A student's dilemma: Work more, get less free money
By Christina Couch • Bankrate.com

For high school students focused on the college years ahead, your life boils down to raising the grades, test scores and dough to make it in to the college of your dreams -- without losing your sanity in the process.

But before you sweat your semesters (not to mention your summers) away pulling overtime on a job or paid internship, consider this: As a dependent, the federal government expects you to put a significant portion of your hard-earned cash toward the cost of higher education. Expecting to bank big before your freshman year of college? Watch out -- your extra income could cost you financial aid bucks.

"The FAFSA (Free Application for Federal Student Aid ) contains a built-in formula that tries to calculate exactly how much of your income should be used toward educational expenses as fairly as possible," says Brandon Rogers, author of "Ten Things You Gotta Know about Paying for College."

"For students who, for example, work full-time all summer the year before school, the FAFSA does not protect your income as much as your parents' income."

When calculating a family's financial-aid eligibility, the government recognizes that parents are responsible for providing the household's food, clothing and shelter on top of footing expensive tuition bills, whereas dependent students typically contribute little, if anything, toward basic household expenses. In lieu of paying for groceries and electricity, Uncle Sam expects eager young minds to put a significantly higher percentage of their incomes toward college costs.

The formula
When determining how much financial aid you'll need, the government estimates that parents will use up to $29,000 of salary each year for noncollege financial burdens and only assesses a certain percentage of funds exceeding that amount (anywhere from 22 percent to 47 percent, depending on an array of factors such as household size, income level, number of college students in the family, etc.).

Most other assets are assessed at a 5.6-percent rate, including cash stashed in stocks, mutual funds, checking and savings accounts, 529 college savings plans, and after July 1, Coverdell education savings accounts and 529 prepaid tuition plans.

Unfortunately, the formula's assessment of student assets and income is much harsher. According to the National Association of Student Financial Aid Administrators, those still relying on mom and dad for monetary support can only earn up to $2,550 before their incomes begin to count against them. Above the $2,550 level, half of all student income directly subtracts from federal financial aid, since student income is assessed at a 50 percent rate. (The level of "student income protection" increases to $3,000 in July 2007.)

When it comes to other assets, students lose out again. All assets held in the students' names are assessed at 35 percent -- a rate nearly six times that of their parents. Provisions in the new Deficit Reduction Act reduce the rate to 20 percent, but not until July 2007.

"Every time the student earns more money, the amount it impacts their financial aid is greater," says Helen Allen, assistant director of financial aid for the University of Alabama in Tuscaloosa. "[Students] have to make a decision as to whether they want to earn more money and get less free money, or earn less and get more for free."