How do summer jobs affect 529s and financial aid?

Your teen’s summer gig can prepare them for the future — and help them save for college

How do summer jobs affect 529s and financial aid?

Time to read: 2 min

Longer days and warmer weather can only mean one thing: Summer has finally arrived. As another school year comes to a close, your teenager’s calendar may be filling up with beach trips, pool parties — and perhaps a summer job.

Your teen may be focused on the opportunity to earn a little extra spending money, but I believe a job does more than keep kids busy during the dog days of summer: It can set up young adults for a lifetime of success down the road. These days, employers tend to favor candidates with experience over education, and summer jobs add to their resume. A resume packed with work experience can offer a powerful complement to your child’s college degree (as well as a competitive edge) when they begin their career.

Looking at the big picture

A summer gig is often the first step toward a solid financial education. When teens begin to earn their own paychecks, they learn firsthand about managing money responsibly, from the cost of food and gas to the importance of long-term savings.

As a parent of three college grads, I encouraged my kids to allocate part of each summer paycheck to help cover some of their upcoming college costs. Setting aside a little money each month for a “big picture” expense like college taught them the importance of budgeting for the future.

So now the question is — where should a teenager keep their summer savings?

Choosing a savings plan

A 529 college savings fund is a great place to sock away some of those summer earnings for the future. But many families worry that a growing 529 account could affect their student’s eligibility for need-based financial aid. Determining the potential impact of a college savings plan all comes down to the formula that FAFSA (Free Application for Federal Student Aid) uses to calculate aid eligibility.

That calculation is based on two factors: income and assets, including any funds contained in a 529 account. The federal aid formula assesses parental assets at a maximum rate of 5.64% (in other words, for every $1,000 in a 529 account, the “expected family contribution” toward college costs could increase by a maximum of only $56). If your dependent child owns a 529 account in his or her name, those funds will be counted as parental assets and assessed at this same 5.64% rate — considerably lower than the 20% rate at which other types of assets can be assessed. For this reason, I believe 529s are one of the smartest ways a student can contribute summer job money to a college savings account.

529 college savings fund

Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.

Key takeaway

The bottom line is this: Summer jobs can help your child prepare for the future while saving for college — and a 529 college savings account offers a great place for them to put away some of the money they earn. To learn more about saving for college with a 529 fund, visit CollegeBound529.com.

To learn more about the FAFSA process, visit the Federal Student Aid website.1

Discover how 529 plans and financial aid can work together.

Read more expert views on college savings plans.

Important information

Blog header image: Esa Heiskanen/Shutterstock.com

The information contained in this blog is a general description of federal FAFSA rules as of May 2018. Rules are subject to change. Individual schools may have their own rules in regard to need-based scholarships.

1 This link takes you to a site not affiliated with Invesco. This site is for informational purposes only. Invesco does not guarantee or take any responsibility for the content.

For more information about CollegeBound 529, contact your financial advisor, call 877 615 4116, or visit CollegeBound529.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses and other important information; read and consider it carefully before investing. Invesco Distributors, Inc. is the distributor of CollegeBound 529.

Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

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