Your Student’s Income Won’t Hurt Their Financial Aid

By: AnnaMarie Mock

The Free Application for Federal Student Aid (FAFSA) collects demographic, income, and asset information from student applicants and their families. This information is used to calculate a student’s eligibility to receive any financial aid for college expenses based on the Expected Family Contribution (EFC). The EFC is calculated according to a formula that is established by the federal government and is a measure of a family’s financial strength. Schools consider the EFC as one of several factors to determine the amount, if any, a student may be awarded for that school year. Simply put, students are eligible to receive need-based student aid if the sum of their EFC and other estimated financial assistance is less than the total cost of attendance.

The EFC considers a family’s financials in determining the need for financial aid and considers such factors as age of oldest parent, number of children in the family that are in college, family size, parent income and assets, and student income and assets. Assets and income are weighted differently based on the owner.

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Student income is considered at a rate of 50%, so how will this affect the EFC if the student is working before and during college?

Will summer earnings from the current year affect the financial aid package in the fall?
Current year income will not affect the upcoming school year. FAFSA uses income information from two tax years prior. Students applying for aid for the 2020-2021 school year will base the income information from 2018 tax year.

What is the maximum amount a student can earn without impacting their financial aid?
The income-protection allowance indicates the maximum amount of income a student can earn without affecting their financial aid eligibility and is adjusted for inflation each year. The amounts are based on whether the student is considered a dependent or independent student. Dependent students applying for aid for the upcoming school year could have earned up to $6,660 net in 2017 to not affect financial aid eligibility for the 2019 school year. Independent students without dependents of their own could have earned $10,360 net in 2017. Approximately 634,000 students in the 2016 school year were awarded an average of $1,726 through work study programs, but this type of income is not counted towards financial aid eligibility.

If a student earned more than the income-protection allowance, how will this affect them?
If a student exceeds the income limits, 50% of the income above the threshold will be included when determining eligibility. In addition, if the student is a junior or senior in college and is earning above the threshold, this will not affect eligibility for undergraduate financial aid because they will have graduated before the lookback period. The income-protection allowance increases dramatically for graduate school, which may mitigate the impact on part-time work.

Is earned income from employment the only income considered for the EFC?
No! Any interest, dividends, or capital gains earned from accounts in the student’s name will be treated as income. Not only will the income generated from the account be included as student income, but the value of the account will be considered as a usable asset at 20%-25% of the value. However, 529 plans can be excluded as an asset for determining the EFC. A parent owned 529 plan will be considered a parental asset, but withdrawals made are not included in the EFC. If the 529 plan is owned by a grandparent, it will not be considered an asset, but the distributions will be considered as income for the student.

Most students will not make enough between earned and investment income to affect their eligibility. According to the College Board, as of October 2017, 51% of all youths between ages 16 and 24 were employed in some capacity but earned about $1,500 on average. A dependent student working 40 hours per week during the summer would have to earn about $17 an hour in 2019 before there would be an impact on the 2021-2022 academic year. In addition, the Bureau of Labor Statistics released studies that working up to 20 hours a week will boost academic performance for undergraduate students. It is argued that working students develop time management skills to focus on studies and job.

If you have any questions or concerns related to factors impacting FAFSA, please do not hesitate to reach out to your HIGHLAND team.

Author’s Bio

AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, LLC based out of Wayne, NJ. HIGHLAND Financial Advisors, LLC is a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management to help clients focus on what matters most to them.

AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a financial planner and is involved with Upswing Advisor, a platform dedicated toward creating a solid financial foundation for young professionals.  AnnaMarie is a member NAPFA and the XY Planning Network.