Teenagers working this summer are earning great pay, with the average hourly wage this summer a whopping $17.50. That means that working 20 hours per week all summer would earn a student about $3,500. That’s great news for someone who’s trying to save money for college– but it could come back to hurt you on the FAFSA.

Remember that student assets on the FAFSA count for far more than parent assets: 20% vs 5.64%. So if that student had $2,500 left in their bank account come Oct.1 and FAFSA filing, it could cost them $500 in financial aid by increasing their EFC. And that assumes they don’t have any other money. Fortunately you have some options to reduce that impact.

If the money is for college, the student could deposit it into their 529. This has two benefits:

  • The money becomes a parent asset, assessed at the lower rate. If the student deposited $1,000 of their savings in their 529, it would reduce their EFC by almost $150.
  • Putting it into the 529, rather than leaving it in the student’s bank account, makes it more likely that the money is still available for its intended purpose, paying for college.

Even better, many states allow students to receive tax benefits for their own contributions to their 529– especially since higher wages will in many cases result in students owing state income taxes.

Students with earned income can also contribute to a custodial Roth IRA. This removes 100% of the asset’s value from consideration on the FAFSA. So contributing $1,000 to a Roth IRA would reduce their EFC by $200. Plus it’s a great head start on long-term savings. Minors with earned income can contribute to a Roth IRA up to the lesser of the annual maximum ($6,000) or their actual earnings. If they’re under 18 or 21, depending on their state, a parent will need to open a custodial Roth IRA for them, which will convert to a “normal” Roth IRA once they reach the age of majority.

Finally, students can spend their own money on things and get reimbursed (or not) after filing the FAFSA. Back-to-school expenses like yearbooks, activity fees, lunch money and so much more can put a dent into a bank account balance.

Want more tips like this? My book, How to Pay for College, is available now. How to Pay for College walks you through the process of creating a financial plan for college to get your kid a great education at a price that works for your family. From savings to budgeting to scholarships to identifying schools that work for you to insider tips on getting every free dollar available, How to Pay for College is a complete roadmap to an affordable college education.