(MoneyWatch) With the cost of college continuing to climb, millions of students are working to help pay the tab. What many families worry about, however, is how a student's income and assets will impact financial aid.
Here are six things that you need to know about whether a student's earnings and cash will jeopardize aid:
1. The federal financial aid formula factors in student income. The Free Application for Federal Student Aid (FAFSA), which any student seeking financial aid must fill out, does take a student's income and assets into consideration when determining aid eligibility.
2. Students can shield income. Although the FAFSA formula takes students' earnings into account, it allows them to shield a portion of their income so that it doesn't hurt their aid chances. For the upcoming 2013-14 school year, a student could have earned up to $6,130 in 2012 and it wouldn't have jeopardized aid. So as a practical issue, most students aren't going to have to worry about a job hurting them financially.
3. Work-study doesn't count. A work-study job on a campus isn't counted in financial aid calculations, so your child's job clearing dishes in the cafeteria or shelving books in the library won't jeopardize aid.
4. Students have no asset protection. The FAFSA does not permit students to shield their assets in savings and checking accounts from the financial aid formula. The federal aid methodology assesses student taxable assets at 20 percent. So if a teenager has $3,000 in the bank, for example, his eligibility for aid would drop by $600.
In contrast, the FAFSA allows parents to shelter some of their assets from financial aid considerations. How much a parent can shelter will hinge partly on the age of the oldest parent. For instance, a 50-year-old married parent can shelter up to $40,900.
5. Only one day counts for assets. The aid formula only cares about a child's assets on the day a family files the FAFSA. So if a family submits the FAFSA on Feb. 1, 2014, the child would report the value of his assets on that day. If he spent all his money on a used car on Jan.31, 2014, he would report $0 in assets.
6. Don't worry about retirement assets. Any money that students or parents have stashed away in retirement accounts won't matter. A teenager, for instance, could have $5,000 in aand it wouldn't hurt his/her chances for financial aid. In contrast, if a child had $5,000 in his checking account his eligibility for financial aid would drop by $1,000.