Currently, assuming my GPA doesn’t drop or anything, my outside scholarships and grants will cover the entirety of my cost of attendance for the rest of my time at my university. This means I won’t have any student loans and should have some money saved up once I graduate. However, I plan to participate in paid internships over the summer (maybe 2 semester ones too) and I think my bank account will accumulate not an insignificant amount of money. I prefer to not have my grants deducted in doing so because I’m thinking about going to law school or grad school after college and it’d be nice to not have loans in grad school as well (I know FAFSA asks about the money I have saved up). Is there somewhere I can store my money or something or any pathways for me in this situation?
Open an IRA and max it out (ie 5500/year). MUST be earned income, i.e. from a job.
Other than that, no real way of hiding assets. It’s not a bad problem to have.
By the way, make sure you’re withholding extra at your jobs, because you’ll have to pay taxes on the scholarships that are used for anything BUT tuition, books, and mandatory fees. Which is usually quite a large part of the COA.
You can put it in a 529 account and then it is considered an asset of your parents. The fact that you earned it can’t be hidden and anything you earn over the allowance (I think it is about $6500/yr) will impact your EFC.
How much money are we talking here? There are big differences between a 5000 health internship and a 25000 cs internship as far as how that impacts your grants.
The fafsa will assess your assets at 20%. So if you have $40,000 in the bank, your FAFSA EFC will increase by $8000. You would still have $32,000 left. As noted, if this goes into a 529, it is assessed at the parent rate of 5.6% for fafsa purposes. So…bout $2400.
But as I said…you aren’t going to lose ALL of those earnings to your EFC. Most students doing internships or co-ops are happy to be able to contribute to their college costs.
https://faaaccess.ed.gov/fotw1617/help/faadef46.htm
Is it going to be considered coop earnings?
^the above link says that coop earnings won’t be included in income to impact EFC.
Also how much are your parents earning and how much is your FAFSA EFC?
Does anyone know if he could pay the college bill with internship earnings and then save his aid refund (Pell, scholarship), without it being considered an asset because it is financial aid?
I don’t think there’d be an aid refund if he just decided to pay the bill. That’s… a weird thing to do and I don’t think a school would go along with it. Usually financial aid is credited to the bill first and then you pay any remainder. No remainder, nothing you can pay.
I don’t think an institution would just hand over money like that. Seems sketch and it definitely morally goes against the spirit of the law even if OP could get his school to agree with this.
If you have the money, there’s really no reason you shouldn’t lose some grant money. I say this as someone whose EFC has gone up substantially because of my jobs.
To answer your questions, @CourtneyThurston this is likely a 5000-10000 or so internship for a single semester. Dang, so jealous of CS interns, lol.
@mommdc It could be a co-op, not sure at this point. My EFC is quite very low right now (close to 0 i believe).
Thanks for all of your responses, I have to read about a lot of what you guys suggested because I don’t understand what IRA’s, 529’s are and how they work right now.
“I don’t think there’d be an aid refund if he just decided to pay the bill. That’s… a weird thing to do and I don’t think a school would go along with it. Usually financial aid is credited to the bill first and then you pay any remainder. No remainder, nothing you can pay.”
A lot of times, schools will post the bill before aid kicks in…so there is a time frame where that is possible. It happens to my own account every semester.
Regardless, OP would still have to report the income.
@Prometheanart How much do you anticipate you’ll earn in a calendar year? You said 5-10K per semester. Let’s say between your school-year earnings and your summer earnings, your annual income is $20,000.
-Income: Is any of it work-study? Not sure what the maximum is ($5k?). Let’s say $5k. That amount is exempted income for calculating your EFC the following year. So your income, for purposes of determining your financial aid the following year, would be $15,000.
-Assets: Let’s say you spent $6,000 ($500/month) and saved $14,000. The $14,000 would be the total amount of your assets (assuming you started with zero). Your goal is to save as much of that as possible to pay for graduate school. What you should do is open up a 529 account. Each state has a 529 college savings program (it’s named after the applicable section of the tax code). You DO NOT have to open a 529 affiliated with your own state of residence or the state of your college. You can open a 529 in ANY state. You have to research them. Mine is in the Utah program. I live on the east coast.
The reason for investing your education money is a 529 is threefold:
- If it is in your name OR a parent’s name, it is assessed as a parental asset – meaning it will increase your EFC in any given year by only 5.62%. Thus, if you have $14,000 in a 529 plan, your EFC will go up by $787.
- It will earn interest because it is an investment account.
- The interest earned is TAX-FREE for as long as it is in the fund and as long as when you withdraw it the money is used for qualified educational expenses. You can’t use your 529 funds to go on a vacation or buy a car.
Someone upthread suggested putting the money in an IRA. True, it would not be counted as an asset if it were in an IRA. However, an IRA is a retirement fund. You would be charged a large penalty if you were to withdraw the money before age 59.5.
@brantly Thank you for the wealth of information! That’s quite a bit to think about.
Oh you’ll be fine then. 5000-10000 isn’t going to make a massive dent.
“You would be charged a large penalty if you were to withdraw the money before age 59.5.”
Not true for Roth, within like 5 years or something. You can withdraw principal, just not earnings.
I didn’t say pay the whole bill. But if he had a Pell grant and outside scholarships, maybe he could pay some of the bill with work income and then get the Pell grant refunded. A lot of students have aid that covers their tuition and get the Pell grant refunded to use for example for housing costs. The is nothing unethical about that.
Co-op earnings are excluded from student income on FAFSA. Internship earnings as part of college education might too.
That would take care of the income impact on EFC.
Then if he spent some work earnings on his education and saved his financial aid refund that might take care of some asset impact. If he is saving the money for grad school, the 529 account is a good idea too.
But if parents are very low income and qualify for auto zero EFC, then student income and assets, and parent assets won’t matter.
Or if parents qualify for simplified needs, then student and parent assets won’t matter.
But I agree, having enough aid to cover your college expenses, and being able to save up work earnings for grad school is good, and losing some aid is a small problem to have. I assume the scholarships are not affected if EFC goes up if they aren’t need based, so only Pell would be reduced.
But it depends on parent income and other factors whether they qualify for auto 0 EFC or simplified needs, and therefore the student assets would not impact EFC.
@kelsmom, are coop earnings, and internship income a college student earns, excluded from student income on FAFSA?
OP, be sure to take Courtney’s advice about withholding. Be sure that taxes don’t take you by surprise. With big grants/scholarships you need to consider the following:
- taxes - make sure you can pay them and make sure you don’t under-withhold.
- income as it affects EFC - others addressed this, just be aware it can ding your aid.
- assets as they affects EFC - great posts above are very helpful. only thing i’d add is that if you go to a private ‘meets-need’ type school, your assets probably are assessed at more than just the 20% that fafsa does. some are as high as 40%. So ask your school what their formula is.
It’s good that you’re asking these questions. Your school can give you the formula they use, then you can figure out how to manage it all proactively.
FAFSA is now prior/prior year income, so that affects how much impact it has. The problem of what to do with money is better than what to do if don’t have money! And yes, be sure to anticipate taxes. As someone mentioned, you owe tax on portion of scholarships that go toward unqualified expenses (room & board, overage) and these are taxed as unearned income at your parents rate which might be higher than you think.
@lz57c4
How can I proactively withhold extra taxes? From what I’ve gathered reading online, it seems the W4 and W2 will automatically calculate what I should withhold depending on what I record for my college savings and other stuff.
On another note, I’m not aware that I ever had to pay taxes for my scholarships not used for tuition during my time in college so far (at least no one has asked me to) but I guess when I start working the W4 and W2 will consider that?
Normally as a dependent you have a standard deduction of up to $6,300 for federal tax. So if your income from taxable scholarships and other taxable income was under that amount then you probably didn’t have to file a tax return.
Withholding from a job goes by what you put on the W4. You can put on there an additional amount you want withheld from your work income. The IRS website has a W4 calculator tool that might be helpful.
Yes, scholarships and grants that exceed tuition, qualified fees, and books are taxable income.
When you earn more and your parents no longer qualify to claim you on their return, because they don’t pay more than 50% towards your support, then you might be able to claim your own exemption.
Taxable scholarships and grants exceeding QEE may also be subject to “kiddie” tax, and possibly taxed at parents’ rate for dependent students, since they are considered to be “unearned” income for kiddie tax calculation purposes, even though they are also considered as “earned” income for income tax calculation. Scholarships and grants in excess of QEE may not be counted toward amounts earned by students which provide financial support for students, in determing whether a student is dependent or independent for tax purposes by providing more than half of their own sopport.