Help me understand how student summer earnings count

Paying for College
1

<p>Ok,
This is the first summer my son has been able to have a summer job. Before now, his summers have basically been spent watching (babysitting) his father so that I could work more hours beyond what I could during the school year. Because his father can no longer stay alone even the limited amount he could before, he lives in town during the week and I bring him home on most weekends (makes for a long Friday night and Monday morning commute, but oh well). Because stability and routine are very important factors with his condition, I made the decision not to change the arrangement during the summer. </p>

<p>However I did not make the decision in time to allow son to apply for internships (had no idea he needed to start looking as soon as he got to school), so we figured just a typical part-time summer job, his sister worked at a city pool, minimum wage, 20 to 30 hours a week, or if all else failed, Scout camp, low pay but no expenses. </p>

<p>On one of the FA forms I filled out in the spring, it asked if the student was working during the summer and if so, expected earnings less expenses. I wasn't sure so I called his FA officer. She said since he was at home for the summer, his allowable expenses would be transportation and any required uniform or licenses. She also cautioned me to be conservative in our estimate, because if he didn't earn the expected amount and asked for an adjustment later, likely all would be available would be loans. </p>

<p>So we figured 30 hours a week at minimum wage with a round trip commute of 50 miles, 5 days a week, in an old truck that gets about 12 MPG. (I commute close to 60 miles a day, the downside to living in a sparsely populated area). </p>

<p>Well son lucked out and is actually getting 40 hours a week (plus occasional overtime), somewhat better pay and we can carpool a lot of days, (at least semi-relevant experience, a plus, though not financial). He couldn't start till June and he's gone for 2 weeks right now, but they want him back as much as he can before he leaves for school, so our estimate was quite a bit low. </p>

<p>I called the FA adviser, gave her the numbers, and she said, it wasn't an issue, he could use it toward the self-help portion (books, replace work-study or loans, or wherever he needed). Our thought is towards loans, either take out less this year or pay off something from last year (is one preferable to the other?), but then I got to wondering;</p>

<p>It was reported as expected income for this summer, so was it figured into this 2012/2013 year? Because I know, it'll have to be reported as earned income on next year's forms, so my concern is, should we not use it for the current upcoming year, because the formula will expect it to be available for the 2013/2014 year? If so, what should we do with it? Does he bank it until we get ready to file FA for next year, then before we do the FAFSA, take it out and pay it to the school for next 2013/2014 year, give it to me to pay expenses with or what? </p>

<p>It's not like it's a fortune, but one of the things that I find most difficult about, to put it bluntly, being poor, is the need to plan ahead so much. If things were like they used to be I would have encouraged to save some, spend some on something useful, and have some fun, but if the money goes and then it's expected to be available for the following year, it would be a problem. I try to plan as close as I can because I know from experience things happen. </p>

<p>So before I bother his poor FA adviser again, is there a formula or procedure for summer earnings as to what year they apply to, or is it determined by school.</p>

2

<p>he can earn up to $6k without it affecting next years EFC.</p>

<p>But, he shouldn’t have it saved in a student acct when you file FAFSA next year. Either put in your acct or have you use it to pay expenses and then “pay him back” later.</p>

3

<p>Is this a school that requires CSS PROFILE , as well as FAFSA? If that is the case, they can count the student earnings any way the want in terms of the student contribution. They usually have a required student contribution even if the student reports a zero in any income.</p>

<p>For FAFSA purposes, as Mom2collegekids as state, the EFC won’t be affected unless he earns over $6K this year, excluding work study wages. The day you and he complete the financial aid forms, it does behoove you to have your bills paid and for him have reimbursed you for his expenses, and you have that money in an account in your name, because you have an allowance for assets and he does not, plus he is assessed 20% and you are assessed about 5% on assets over your allowance.</p>

4

<p>Yes, it is a Profile school. I know those colleges have a lot of leeway to do things the way they want to, but didn’t know which school year summer earnings are applicable to. 12/13, the year in which are earned or 13/14, the year in which they are reported. I thought that might be consistent across schools. I only asked his FA adviser about 12/13, because the question concerned expected summer earning for the 2012 summer. I was told the larger than expected earnings wouldn’t affect the 12/13 FA. So my question was answered, but upon thinking about it, I wondered if I didn’t ask the right question. </p>

<p>I think what I should have asked the FA office was; Are those earnings going to be considered available for the 13/14 school year, as that’s they will be reported on the 13/14 FAFSA? If so, we might not want to spend it for this year’s expenses as they are covered, because while it’s under the exclusion amount it is a large enough sum that if it’s spent on school expenses this year and I have to come up with that amount for next year, it could be a problem. </p>

<p>I get there is an income exclusion for the student earnings for the FAFSA, and he won’t go over that, but institutional aid makes up a far larger percentage of his aid package, and I’m guessing in the income exclusion only applies for federal aid purposes and the school can handle it however they want. So since it looks like the school can do it however want, my best answer will come from them. I just need to figure out how to phrase it, so it’s clear what I’m asking.</p>

5

<p>A school looks at the earnings for the full calender year before. If you are going to start this fall, only earnings for the 2011 year count. The information will likely be crosschecked against tax information, so it has to mesh. Your summer earnings for this summer will be included for the school year starting Fall 2013. Some student will continue to earn money during the fall semester, so it makes no sense to pick up the summer piece when it will be info for the 2012 tax return and can be verified that way.</p>

<p>Where it gets confusing is that in addition to earnings of the prior year ended, FAFSA and PROFILE also want a list of assets AS OF THE DATE YOU FILL OUT THE FORM, not 12/31 of the year for which you have provided income. SInce you cannot complete the forms for the fall until the January 1st of that year since the forms do not come out until them, the asset figures will be as of a date that year, for instance for this coming school year, you will have had to have filled out FAFSA on a date during this year, 2012, and those assets may well include money you have made during this year. Confusing, isn’t it? It’s not like accounting when the balance sheet shows assets as of the same date as the year end of the income statement. </p>

<p>So whenever you fill out your FAFSA, or your PROFILE, it is a smart idea to pay all your bills so your accounts are as empty as possible on that day. It would be a very bad idea to fill out the forms on pay day, for example, when the mortgage payment is going to be paid in a day or two, but the money for it is sitting in the account that day. You cannot have “payables” in the asset statement and you cannot explain that money is being earmarked with the exception of financial aid money on the part of the student. And you can’t redo the FAFSA for that reason, if you did not think of this. Once you fill it out and submit it, you are stuck with the money/assets sitting in your account on that day. </p>

<p>It’s also a good idea, if you are a student, to pay your parents for your expenses, and have them put the money aside for you since they are assesed far less than you are for assets. You get hit a big fat automatic 20%, no allowance. They get an allowance, and are hit about 5-6% on assets over the allowance. Students get a $6K income exclusion, but a zero asset exclusion.</p>

6

<p>Scribbulus, I think that yes, the income he has this year is expected to go toward his 2013/14 school year (if it ends up being over whatever the school’s exclusion amount is). But is there any reason to think he can’t earn as much next summer? I think I’d go ahead and let him use it to take out fewer unsub loans. I asked the same question as you about paying off existing loans versus taking out fewer new ones <a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/1364645-pay-off-existing-unsub-loans-take-fewer-new-loans.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/1364645-pay-off-existing-unsub-loans-take-fewer-new-loans.html&lt;/a&gt; and it turns out that it’s slightly better to take out fewer new ones, because there is an origination fee on the new ones that you can avoid paying by not taking them. He might as well take any subsidized loans he is eligible for, but avoid the unsub ones (and possibly pay off existing unsub ones if he can). </p>

<p>If he does want to bank some of it for next year, open a 529 account that you own with him as a beneficiary. Then have him contribute money toward the household expenses from his income, while you then contribute an equal amount to the 529 account for his future education. There might even be some tax benefit to you to making the contribution. That will count as your asset and will impact his EFC for the next year a lot less than if it were in his bank account.</p>

7

<p>Understand that FA office look at money in different pots and “tax” them differently based on which pot (or unfortunately, potS) it comes from. From savingforcollege.com:</p>

<p>20% of a student’s assets (money, investments, business interests, and real estate)
•50% of a student’s income (after certain allowances)
•2.6%- 5.6% of a parent’s assets (money, investments, certain business interests, and real estate, based on a sliding income scale and after certain allowances)
• 22%-47% of a parent’s income (based on a sliding income scale and after certain allowances) </p>

<p>Thus, your son’s income will get tapped at 50% after the allowance and then if he saves it in his name at the time the FAFSA is completed, it will get tapped again for another 20%.</p>

<p>I like the idea of putting it into a 529 or Coverdell ESA. Another possiblity to consider is putting it into a Roth IRA. He won’t be able to touch the IRA money for the first five years that the account is open, but it will prevent the FA office from including it in their calculations.</p>

8

<p>You know, I hadn’t even thought about the investment angle. Son’s uncle, my youngest brother, is big on investing, (and has been extremely successful at). He and my son have talked a bunch and at the beginning of the summer, he asked me if he could invest some of his earnings, and I told him that was fine. He’s researching over the summer. I completely forgot about investment assets being tapped for FA purposes. </p>

<p>So are Roth IRA’s not tapped for FA aid? How about other IRA’s? Almost all our investments went to cover living expenses for the 9 or 10 months until my husband’s advisability claim was approved and to pay for medical expenses, testing and rehab that wasn’t covered by insurance. I was in denial for a couple years, kept thinking there had to be something, somewhere that could fix him, spent a lot of money that in retrospect I shouldn’t have, so now I’m starting over. </p>

<p>So, I’m guessing at this time he shouldn’t invest in a mutual fund which was the route I started with way back when. Guess I need to read up on the changes, can anyone point me to a source toward what options I have for any investing (I’m 52) and what options son (19) has that wouldn’t be tapped for FA. I had already figured out that I shouldn’t sell the house or have any timber harvested, at least till senior year.</p>

9

<p>Be aware that PROFILE schools can do what they please and they do ask for retirement fun information. They are extremely reluctant to say what they use in terms of coming up with the contribution, but some schools are using 401Ks and other such fund assets.</p>

10

<p>cpt - Wow! This is the first time I have heard of retirement funds being tapped by FA offices. I have twins who are rising seniors so I have not yet dealt directly with a school’s actual FA, but I have used many Net Price Calculators. It seemed to me that they all specifically stated the exclusion of retirement funds, but it certainly is possible that my eyes glazed over after the first dozen or so and I just assumed that it was there. They almost seem designed to be confusing.</p>

<p>Is the inclusion of retirement funds a new trend? Are the number of schools that consider retirement funds a small minority, or have I missed something big? Do they treat parents’ IRAs and students’ IRA differently?</p>

<p>To me, it would seem unethical for them to require applicants to withdraw funds that could entail severe negative tax consequences (especially since money is already tight during college years).</p>

<p>I apologize for possibly hijacking the thread, but this is something that worries me.</p>

11

<p>rmldad, my impression is that they (Profile schools) ask, but don’t include them unless you have significantly more than “expected” for your level of income and other assets. I think it’s a hedge against people gaming the system by hiding excessive amounts of assets in retirement vehicles.</p>

12

<p>Not that new. Boston College out and out admits they include 401K and other such plan assets, but demurred when asked how.</p>

<p>I don’t think anyone is trying to game any system putting money into retirement plans. The whole idea is to put your money on retirement plans before you put them in your kids’ college plans. I agree that those who have amounts that a college deems “excessive”, they will tap it. The key question is “what is excessive” and you won’t get an answer to that. It’ll depend on age, amount, other assets and how much money they might have. I doubt a college will share their formula. </p>

<p>I have no idea how a college will view a prospective college student with an IRA. </p>

<p>However, that is why you apply to a variety of schools when you need or want money, as different schools treat these things differently.</p>

13

<p>well, the point is if I report an income of $10K per year and have a million in retirement assets, the school is going to wonder how they got there. Is there some kind of tricky reporting going on, or some unreported individual supporting me? That’s my impression of what they use it for anyhow.</p>

14

<p>If I can get a little help with this, then from what you’re all saying…</p>

<p>If a kid earns, for example, $1000 during the Summer, he can keep it in his account. Some time during the Fall, most of it should be transferred to his parent’s account so it is not tapped in the fin. aid decision. Is this right?</p>

<p>If this is correct, isn’t this sort of obvious to colleges? Or maybe it doesn’t matter that the money is just trading places.</p>

15

<p>The kid <em>still</em> has to report the $1000 as income. </p>

<p>You should have some reason why the kid’s money is in your account, namely that it isn’t your kid’s money anymore. He gives you the money maybe for rent, if he lived at home, or reimburses you for some other expense you incurred on his behalf (medical, whatever). </p>

<p>If you then decide to pay some of his portion of his college costs for him, how nice of you. </p>

<p>An alternative to having the money in a parent account is for the kid to spend it – paying his share of the family contribution for the fall, paying off some of his loans, taking fewer loans, pre-purchasing textbooks, etc.</p>

<p>The point is just that it’s better, if the kid has things he needs to spend the money on, for him to spend it before he fills out the FAFSA rather than after. If he’s filling out the FAFSA in February or March, it’s quite reasonable for him to have spent the prior summer’s earnings by then and have virtually nothing left in the bank. I wouldn’t totally empty the kid’s account, but you don’t want a big chunk of cash sitting there either. If he’s saving for something (even the next semester at school) it’s better for the money to be elsewhere (i.e. he pays additional expenses and you save on his behalf).</p>

16

<p>Mathmom,</p>

<p>Thanks so much - very helpful advice.</p>

17

<p>I absolutely agree that 401K/IRA money should be taken into account when there is a huge amount in there. It’s just a matter of at what point it starts to count, and colleges have been mum on that. </p>

<p>My son’s girlfriend’s mother has a relatively large IRA due to the fact that she is a widow of a relatively well to do man. The girl’s father died some years ago–he was older, and the retirement accounts went to the spouse. They live modestly, and the money is there for retirement. Who is to decide how much is excess in such a case? Both daughters went to state schools so the amounts were never an issue, and I don’t know if they even got aid, but the mother certainly does not make enough to send them to a private school without tapping the retirement fund or with financial aid.</p>

18

<p>There really is no clear evidence that colleges tap retirement accounts. Check the net price calculators. I have not heard of one that asks for balances in retirement accounts. </p>

<p>The speculation is that colleges will scrutinize retirement accounts IF it looks like the family has excessive amounts in retirement relative to actual income… Thus making it appear that this excess money should have been made available for college costs. </p>

<p>Yes BC asks for retirement account balances…but how those are used is not really known.</p>

19

<p>It (retirement account totals) is asked for on the Profile. What schools do with the information no one really knows.</p>