Two young adults graduate with the same major from the same college in the same year. One of them gets a job and the other enters a funded graduate program. Their financial lives have just diverged, despite their similar professional starting points, and it’s not because the graduate student lacks an income.
Here are the top ways graduate students are financially distinct from their young professional former peers.
Limited Income, Unlimited Training
Graduate students are among the best and the brightest college graduates, but that isn’t reflected in their stipends/salaries.
The value proposition of graduate school is that the student will be provided with training, and therefore the stipend is only intended to cover living expenses (more or less) to keep the student from undertaking outside work. (Of course, some students undertake unfunded PhDs or lose their funding at some point.) So the grad student’s income is suppressed, and there is little opportunity to increase it without engaging in a side hustle. This is very different from a regular job, where there is a chance for promotion or at least opportunity to take a different job with a better salary without derailing your career trajectory.
A compounding factor in this situation is the uncertainty of the length of the training period. It’s unusual for a PhD in the U.S. to take less than five years, and apparently the average is 8.2 years. This is such an issue that asking a PhD student when she’s going to graduate is viewed as a faux pas. It takes an unusually driven graduate student and motivated advisor to accurately set the end date for the graduate degree more than a year in advance, let alone at the start of grad school. And even the end of graduate school doesn’t mean the student will get a big income boost, as 65% of PhDs will continue their training as postdocs.
These factors together mean that a grad student has a low salary for an uncertainly long amount of time: at minimum half a decade, and for many a decade or more.
Not a Full Employee
The exact nature of the relationship between the university and the graduate student is being reinterpreted at many universities around the US due to the recent National Labor Relations Board ruling that allows the unionization of graduate student assistants at private universities.
Graduate students are certainly “students” in the eyes of the university, and graduate assistants are also considered “employees” secondarily. The benefits offered to graduate students therefore often straddle these two statuses; they receive some or all of the benefits that undergraduate students do, but virtually always less than other classes of employees like faculty and staff.
Commonly, graduate students take part in the student health insurance plan, and the premium might be partially or completely paid as one of their benefits. Beyond that, benefits vary widely by university, school, and program. Some graduate students may have defined vacation policies while others’ are left to the discretion of advisors; some get dental and vision insurance alongside health insurance; some receive subsidies for housing or childcare; some receive a free or subsidized gym membership; very few even have access to a 403(b).
Common financial advice to young professionals to take full advantage of employer benefits by contributing to a 401(k) at least to the full match amount and maximizing the value of life, disability, health, dental, and vision insurance benefits therefore does not apply to graduate students. Conversely, graduate students may access to student benefits that are very unusual outside of universities, and it’s very important in those cases that the students are aware of all their benefits.
Fellowships Do Not Provide Taxable Compensation
While grad students receiving stipends have an income, they don’t all have “taxable compensation” or “earned income.” Graduate students (and postdocs) whose salaries are paid by fellowships are not being compensated/earning their income. (Their income is still taxable, however.) They are not employees, but neither are they self-employed. Therefore, they are not eligible for tax benefits that are tied to having compensation or earned income, such as IRA contributions and the earned income tax credit. Having an income that is not reported on a W-2 also may throw a wrench into the process of taking out a mortgage. This situation is very hard to wrap your mind around when you first hear about it because it is so different from what (self-)employed people experience.
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The silver lining to having a low income is that you don’t have to pay much in the way of income taxes. Nearly all graduate students whose only income is their stipend will fall into the 15% marginal tax bracket or lower. Therefore, tax reduction strategies that might be recommended to young professionals are not as beneficial for graduate students. For example, contributing to a Roth IRA is a great idea for a graduate student with taxable compensation, while a young professional with a higher income might benefit more from using a traditional IRA or 401(k).
The unexpected bonus to being in the 15% tax bracket or lower is that the current federal tax rate on long-term capital gains and qualified dividends is 0%. Therefore, even graduate students who are saving for retirement outside of tax-advantaged retirement accounts can minimize the tax bite on their investments.
Finally, graduate students do not have to pay FICA tax, either because they have a student exemption or because they aren’t receiving compensation. Young professionals can’t easily avoid that 7.65% tax bite.
Access to Student Loans
Lastly, graduate students have the option to take out student loans. If the student experiences an income drop or a personal emergency, they could take out a student loan to cover it, whereas a non-student would more likely turn to credit cards or personal loans. While using a student loan in these circumstances might be advantageous in some ways (for example, the interest rate is almost certainly lower than the interest rate on a credit card), student loans are more uniquely dangerous than other kinds of debt because they cannot be discharged in bankruptcy. A graduate student, because of this access, therefore needs enhanced information and counseling when looking to take out a new loan.
In what ways are graduate students financially different from their age-mates who have real jobs?
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