College students who aspire to earn PhDs often ask themselves if they should proceed directly from undergrad into a PhD program or take a year or more “off” to work. From a career perspective, there are some arguments on either side (and it’s probably field-dependent), though personally I think it’s better to not go straight from college to grad school. However, from a financial perspective, working for at least a year prior to starting grad school is a slam-dunk better choice – provided you handle your salary the right way in the meantime.
I’ll assume in this article that you’re earning more in your post-college job than you will as a grad student. I know that’s not always the case (my postbac fellowship paid a stipend comparable to that of a grad student), and if it’s not true for you, simply pick and choose the advice that works for you.
This article provides financial arguments for working prior to starting a PhD and gives you a strategy to combat the biggest potential downside to doing so. Working before starting a PhD program gives you the best shot at starting grad school (and the rest of your life) on the right financial foot.
Save Cash for Start-Up Expenses
Starting grad school, especially if you have to move to do so, is a cash-intensive endeavor. It can be done on the cheap depending on your city, but you are looking at paying for much or all of this before receiving your first grad student paycheck:
- Moving expenses
- First month’s rent (maybe last as well)
- Security deposits, installation fees, and/or service fees for housing and utilities
- All your normal living expenses like food, transportation and personal care for a month or more
- Fees (and possibly tuition) if not covered by your program, e.g., parking or an insurance premium
- Textbooks and other course-related expenses
Those expenses are similar to any that you would incur if you moved for a job, but in addition you have the educationally-related ones and you most likely will wait over one month for your first paycheck to arrive instead of the two weeks to one month typical for a job.
If you work prior to starting grad school, you have the opportunity to save for those start-up expenses. If you don’t have enough savings available when you matriculate, you’ll start grad school already feeling financially behind.
Build a Strong Financial Foundation
Working prior to starting grad school also means you can improve your overall financial health compared to where you were when you finished undergrad. You can work on one or more of these goals right away:
- Saving cash for an emergency fund and short-term irregular expenses
- Paying down debt (prioritize high interest rate debt such as credit cards and unsubsidized student loans)
- Contributing to a tax-advantaged retirement account such as a 401(k) or IRA
Starting grad school doesn’t necessarily mean stalling financially, but it is easier to make progress with a salary intended to do more than pay basic living expenses.
Further reading:
- How to Prioritize Financial Goals When You Can’t Do It All
- Basic and Stretch Financial Goals for Graduate School
Investing for Retirement
I already mentioned retirement saving above, but it’s worth emphasizing again. Saving for retirement during grad school is a challenge. This is due primarily to your limited cash flow, but in addition grad students are sometimes disallowed from contributing to any kind of tax-advantaged retirement account due to their income type. If you receive only fellowship income throughout an entire calendar year, you will not be able to contribute to an IRA. It is also exceedingly rare for a grad student to have access to a workplace-based retirement account like a 403(b).
Further reading: Taxable Compensation or Earned Income
Getting an early start on retirement investing will make an enormous difference in your account balances once you reach retirement. For example, if you work for one year until age 23 and contribute $1,000 per month to a retirement account, just that $12,000 contribution alone can grow to approximately $434,000 by the time you are 68 (assuming an 8% average annual rate of return.
Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement
If you have to slow down or stop retirement investing during grad school, you can still feel good about the investments you already have in place that are working for you in the background.
If your employer provides a retirement match, please contribute enough to get the full match! It’s going to be a long time before that opportunity comes around again.
Applying Everywhere that Is a Fit
Grad school applications can easily cost over $1,000 between the direct application fees and indirect costs like taking the GRE. If you are working when you apply instead of doing it during college, you will have more money (and time) to apply and visit everywhere that is a good fit for you. It would be such a shame for a low budget for applications to constrain your career choices.
Further reading: The Full Cost of Applying to PhD Programs
Start a (Passive) Side Hustle
Side hustling during grad school is a great way to earn some extra income, maintain an identity and emotional outlet separate from your research, and potentially improve your post-PhD career prospects. But when you’re busy with research, classes, and/or teaching, it can be difficult to put in the time and energy needed to get your side hustle off the ground.
It’s much easier to maintain a side hustle you established prior to starting grad school (or you could continue some aspect of your job as a side hustle). An ideal side hustle for someone anticipating entering grad school is one that is location-independent and time-flexible.
The perfect side income for a grad student is not a “hustle” at all but passive income. Passive income comes in many forms, but requires an up-front investment of time or money to establish the income stream with little to no additional work required on an ongoing basis.
Minimize Your Tax Burden
In our current low tax environment, I don’t talk about tax planning, that is, changing your behavior due to the tax implications. I don’t like to let the “tail” of tax repercussions wag the “dog” of the rest of your life. However, in this case, I want you to at least be aware of the tax implications of starting a PhD program right away vs. waiting a year or two.
There are two big tax effects of having a “student” status (i.e., being a full time student in at least part of five months in the calendar year) and also being young (i.e., 23 or younger on 12/31 of the year in question).
Dependent
Normally, being considered a dependent of your parents expires at age 18, but students can be claimed as dependents up until the year they turn 24. Generally speaking, being claimed as a dependent is bad news for your tax return and good news for your parents’ tax return (or whoever is claiming you).
There are a few ways to avoid dependency status in the year you exit undergrad and/or the year you enter grad school, all of which can be more easily accomplished by working in between:
- Live apart from your parents for at least six months of the year you finish undergrad (assuming you graduate in the spring) and continue to do so until the year you turn 24 (at least).
- Wait to start grad school until at least the year in which you turn 24.
- Provide at least half of your own “support.” Support is basically all your expenses, both living expenses and educational expenses. If you provide at least half of that support through your own income (taxable fellowships and loans count, but scholarships do not), you are independent. This is much easier to accomplish if you earn a higher income and minimize your educational expenses in any year that you are under age 24.
Kiddie Tax
The Kiddie Tax is bad news for the “kid” subject to it (that’s you, potentially) as it imposes a much higher tax rate on “unearned” income than what you would have on ordinary income. Weirdly and unfortunately, fellowship income is considered “unearned.” If you are a student, under age 24, and do not provide more than half of your own “support” with ”earned” income, your “unearned” income is subject to this higher tax rate. You do not have to be a dependent for the Kiddie Tax to apply to you.
How do you avoid the Kiddie Tax through tax planning? 1) You can wait to start grad school until the year you turn 24. 2) If you start grad school prior to the year you turn 24, make sure you have enough “earned” income in each year you are a student to cover at least half of your own “support.” Keep in mind that “support” includes educational expenses.
How to Make the Most of Your Salary and Start Grad School on the Right Financial Foot
Have you ever heard the advice to “live like a college student” or “live like a resident?” Take that a step further and “live like a grad student” in your working years prior to starting grad school.
Further reading: Is “Live Like a College Student” Good Advice?
The advantages to living like a grad student when you have a job are three-fold:
- You will get a head start on the essential financial skills you’ll need during grad school, such as budgeting, frugality, and saving.
- You will rapidly increase your net worth through saving and/or debt repayment because you will be living far below your means.
- You will avoid experiencing the very painful process of decreasing your standard of living when you enter grad school.
Living like a grad student when you have a better-paying job is definitely a sacrifice, but it’s one that is well worth it. I often speak to grad students who worked prior to starting grad school, and their common refrain is “I wish I had saved more when I had the chance!”
