Remember the good ole days? Back when you could have a summer job working as a camp counselor, a babysitter or a lifeguard, and help fund a significant portion of your college expenses?
While these were – and still are – noble endeavors that can teach young adults valuable lessons about social and financial responsibility, when it comes to paying for college these days, they’re simply not that useful anymore.
In fact, depending on how much one makes, it may actually be doing some harm.
Why? Because the federal financial aid formula factors in a student’s income. In fact, a student’s income and assets are the biggest piece of the financial eligibility formula. Any income over a base protection amount ($6,130 earned in 2012 for the 2013-14 school year) is heavily assessed, and all assets held in the student’s name are assessed at a maximum of 20%. Student assets can include things like their own bank accounts, trust accounts, UGMA/UTMA custodial accounts and education trusts. Retirement assets like Roth IRAs are not included.
For example, if Junior has $10,000 in a Roth IRA, it won’t impact his financial aid eligibility one iota. If he has $10,000 in his bank account, though, his eligibility may drop by $2,000.
This isn’t to say that Junior shouldn’t take that amazing (paid!) internship at a local law firm, but from a college planning perspective, it may be in both his and your best interest to take the income he receives from that job and place it in an account in your name, since parental assets are assessed at a much lower rate than a student’s (approximately 5% versus 20%).
Junior can also avoid taking a major financial aid hit by getting a work-study position on campus, which doesn’t factor into financial aid considerations. He’ll still get the benefits of a regular job – income and discipline – without the financial aid penalty. Moreover, since most work-study positions are on campus, he likely won’t have to take a portion of his income to pay for transportation to and from his job.
Planning for college funding is complicated – and we’re here to help. If you feel overwhelmed by the number of options available to you, consider attending our upcoming webinar, “Education Planning and Funding: 4 Steps to Help Ensure Your Plan Makes the Grade,” on August 21, 2013.