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How to Establish and Improve Your Credit as a Graduate Student or PhD

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In this episode, Emily explores the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, she also reveal the biggest credit killer that she sees among the PhD community and how to overcome it. As ever, the content is tailored to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

Links Mentioned in the Episode

Intro

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 6, and I don’t have a guest today, but rather I’m exploring the topic of credit: what is it, why it matters, how to establish it, how to improve it, and when you can stop thinking about it so much. Near the end, I also reveal the biggest credit killer that I see among our community and how to overcome it. As ever, I have tailored the content in this episode to the PhD experience of finances in the US, including that of international students, postdocs, and workers.

I’m eager to devote time to this important topic because many PhDs, especially those who grew up outside the US or are from underprivileged backgrounds, don’t have credit or have poor credit or are concerned about their credit. If you have good credit, it’s not something you have to pay much attention to. But if you have poor credit or no credit, it can really hold you back financially and limit your life choices.

The credit bureaus start tracking our financial actions as soon as we start taking any. For many of us, that starts when we’re minors or college students, long before we may have the financial acuity to safeguard and foster our credit. Very sadly, some children and adults are victims of financial fraud, which can destroy your credit through absolutely no fault of your own, and it can be very difficult and painful to rectify.

I expect listeners of this episode to run the gamut, from PhDs and graduate students with great credit to those with poor credit to those with no credit. You will all find great information in this episode, including what steps you should take to establish or improve your credit, if necessary, and some reassurance as to when you can put your credit out of your mind.

What Is Credit?

Asking the question “What is credit?” seems like a basic place to start this episode, but I actually had to search a little harder for a good definition than I was expecting. In fact, the best definition I found was for the term creditworthiness rather than credit, and it’s from Investopedia.

“Creditworthiness is… how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you. Creditworthiness is determined by several factors including your repayment history and credit score.”

Basically, credit is a tool that lenders use to evaluate how risky you are to lend to, which affects whether whether they will work with you at all and what interest rate you’ll be offered. This evaluation is based on your past use of credit.

All of your credit-related activity is tabulated in your credit report. Actually, you have multiple credit reports, each prepared by a different credit bureau. There are three main credit bureaus: Equifax, Experian, and Transunion. In theory, they are all working off of the same information.

The information that is included in each of your credit reports is 1) personally identifiable information, such as your name, social security number, and address; 2) lines of credit and payment history, which is all of the loans and credit that have been extended to you and your repayment history with each, going back approximately seven years; 3) credit inquiries, which is a record of each time your credit is viewed by a potential lender; and 4) public record and collections, which is a record of bankruptcies or bills that have gone to collections because you neglected to pay them.

Your credit reports are used to calculate credit scores. You actually have many credit scores calculated in different ways by different bodies for different purposes. The most popular credit score for mortgages and similar loans is the FICO credit score. A close second is the VantageScore. We’ll return in a few minutes to how those scores are calculated and what they mean.

The main points I want you to take from this section are that your credit scores are based on your credit reports, which are records of all of your credit-related activity.

Why Credit Matters

Why should you or anyone else care about your credit or your credit score in particular? You can see that your credit is based on how you’ve treated your debt and some other financial obligations in the past, and it was developed to help lenders asses whether they should lend to you under the assumption that you will behave in the future as you have in the past. So clearly your credit matters if you are trying to take out a loan, like a mortgage or car loan, or a line of credit, like a credit card.

Rather strangely, your credit score is also often referenced when someone wants to quickly judge how financially responsible you are. Landlords, utility companies, and insurance companies often access credit scores, and some employers and even governments do as well. It is a big leap to assume that how you’ve treated debts in the past is predictive of general financial responsibility in the future, and I think it’s quite unfair.

People who have no credit are often quite financially responsible because they have managed to run their lives without the use of debt, but that’s not reflected in their nonexistent credit score. Also, credit you may have had in your home country does not translate to the US; you have to start over. And for anyone with poor credit, the actions and/or circumstances that created that low credit score are not ones that will necessarily be repeated in the future. You can change your financial behavior on a dime, but it takes a long time for your credit score to catch up.

The Equal Credit Opportunity Act of 1974 ostensibly prohibits discrimination based on race alongside other factors, but in practice there is a credit gap. A recent study by Credit Sesame found that 54% of Black Americans had no credit score or a poor or fair credit score, while only 41% of Hispanic Americans, 37% of white Americans, and 18% of Asian Americans had the same. The credit gap stems from the Black-white wealth gap, homeownership gap, employment gap, and income gap, and perpetuates the wealth gap and homeownership gap.

The credit gap is caused by systemic problems, and systemic solutions are warranted. However, in this episode, I’m going to focus on what you can do as an individual to impact your own credit score.

What is a good credit score and how is it calculated?

The FICO credit score and VantageScore range from 300 to 850. According to a lovely Nerdwallet graphic linked in the show notes, a score of 720 to 850 is considered excellent, 690 to 719 is good, 630 to 689 is fair, and 300 to 629 is poor. For another reference point, a FICO credit score of 760 and above will get you the best interest rates on a mortgage.

https://www.nerdwallet.com/article/finance/what-is-a-good-credit-score

While the exact algorithm for calculating FICO credit scores is proprietary, we know that 35% of the FICO score is based on payment history, 30% on amounts owed, 10% on new credit inquiries, 15% on the length of your credit history, and 10% on the mix of credit. We’ll get into what actions you can take in each of these areas to improve your credit score momentarily.

How do I establish credit?

Before we get there, I want to speak to those of you who do not have any credit history in the US. I do think it’s worthwhile to establish credit history and a credit score if you are not yet financially independent. A good credit score is useful as a renter and a virtual necessary when taking out a mortgage.

As I explained earlier, credit is self-referential. To have credit, you must have had credit. So how do you get your foot in the door?

The simple and free way to do so is to take out a secured credit card. This is a special kind of credit card designed to help people establish credit. You turn over a deposit, which becomes your line of credit. You borrow against that line of credit and then pay it back. After about six months, you should have a credit score and be able to move on to more conventional debt products, if you want to. These credit cards are often marketed as student cards.

Alternatively, if you have a family member who is very responsible with credit, you could ask to be added as an authorized user on one of their credit cards. In this way, their good credit sort of rubs off on you. You don’t actually have to even have or use your authorized user card. Just make sure that the person you ask to do this pays off their credit card balance in full every statement period. As soon as your credit score is established and high enough, take out your own credit card to establish your independent credit history. As I learned from Sam Hogan, a mortgage originator with PrimeLending (Note: Sam now works at Movement Mortgage) and an advertiser with Personal Finance for PhDs, in one of the live Q&A calls we’ve held, your credit score may look good with only an authorized user card in your history, but you won’t qualify for a mortgage on that alone.

There are two other solid ways to establish credit, but they are not usually free, and therefore I suggest you only undertake one of them if it is very financially important to you to establish the highest possible credit score quickly. That’s not usually necessary, so these are sort of extreme steps.

Method #1 is to take out a loan with a bank, sometimes specifically called a credit builder loan. This is an installment loan, so it’s a good complement to the revolving line of credit you likely already have with a credit card. It’s not enough to take out the loan, but rather the point is to make the minimum payments consistently to demonstrate that you are capable of repaying debt responsibly. The cost here is the interest you’ll pay throughout the repayment period, so you should shop around for the best rate available to you. You could also consider doing this with a student loan if you are a student, but since the loan won’t go immediately into repayment, I’m not certain it will have as positive an effect on your score as a credit builder loan would. Plus, student loans are not dischargeable in bankruptcy, if it came to that, so that’s a strike against them in comparison with a bank loan.

Method #2 is to pay a service to report the payments you are already consistently making to the credit bureaus. For example, the service might report your rent payment, which would not normally be included in your credit report. The cost here is the fee for the service, so again, shop around. You won’t have to keep the service up indefinitely, only long enough to qualify for another debt product.

This last tactic of reporting rent payments to credit bureaus and having them be calculated into credit scores is, from what I can tell, the top method being pursued to address the credit gap. A few landlords are starting to report rent payments to the credit bureaus on behalf of their tenants for free. The newest versions of the FICO and VantageScore algorithms do take rent payments into consideration, but most lenders still rely on older versions of the algorithms.

How do I improve my credit?

Now that we’ve covered establishing credit, let’s go deep into how to improve credit. Please take note from the outset here that improving your credit score is a long game. You must practice good credit behavior consistently for years. Since the length of your credit history is taken into account, you really can’t attain a top credit score until you’ve been using credit for at least a handful of years.

I’m going to give you at least one suggestion from each category that goes into the FICO credit score. Don’t be shocked when one or two of the suggestions contradict each other!

35% of the FICO score is based on payment history. This is the key category. Make your payments on time and in full every time. For years.

30% of the FICO score is based on amounts owed. Pay down your debt. Pay off your debt. For a specific hack, keep your credit card utilization rate low. Your utilization ratio is the balance you owe across all your credit cards divided by the sum of your credit limits. You should keep this ratio below 30% or ideally below 10%. Please note that your utilization ratio can be viewed at any point in your statement period. So even if you pay off your credit cards in full every period, as you should, having a high utilization ratio at some point earlier in the period will still ding your score. You can keep your utilization ratio low without changing your spending by 1) requesting credit limit increases across all of your cards, 2) applying for new credit cards to increase your overall credit limit, and 3) paying off your cards multiple times each statement period instead of just at the end.

10% of the FICO score is based on new credit inquiries. Don’t apply for any new loans or lines of credit. I warned you that some suggestions would be contradictory!

15% of the FICO score is based on the length of your credit history. Basically, you just need to let time pass. It helps to keep your oldest credit card open indefinitely and to close newer accounts if you want to close any. If you haven’t opened a credit card yet, choose one without an annual fee to be that first card.

10% of the FICO score is based on the mix of credit. Specifically, this means having both revolving lines of credit, like credit cards and home equity lines of credit, and installment loans, like a mortgage, car loan, student loan, etc. If it was really important to you to improve your credit score and you didn’t have any installment loans, you could take one out, like the credit builder loan I mentioned earlier, but it will cost you.

Another great, general step to take is to check your credit reports for accuracy once per year through annualcreditreport.com, which is the government-sponsored website where you can order one credit report per year from each credit bureau. During the pandemic, that limit was increased to once per week. Keeping tabs on your credit reports is part of your basic good credit behavior.

Credit killers

Now I’d like to explore the main credit killer that I see PhDs and particularly graduate students falling into. And it’s not student loans! Believe it or not, as long as you’re current on your payments and your balance isn’t inordinately high, student loans are kinda good for your credit score. No, the big credit killer, and killer of your finances overall, is credit card debt.

According to the Council of Graduate Schools’ recent report, Financial Education: Developing High Impact Programs for Graduate and Undergraduate Students, 85% of graduate students have a credit card. Forty-five percent of those carry a balance on their cards, with 9% only making the minimum payment.

Everyone listening to this podcast episode knows that finances in graduate school are challenging at best. We can all understand how readily an emergency or unexpected expense could result in a carried balance on a credit card. But, I implore you, instead of accepting that your credit card balance will be with you until and through graduation, get aggressive about ridding your balance sheet of this most toxic kind of debt.

Ideally, you would pay your balance off by increasing your income and/or decreasing your expenses and throwing all available cash—outside of a starter emergency fund—at the debt. Depending on how high that balance is, you may not have to make these sacrifices for long.

If it is absolutely impossible for you to increase your income or decrease your expenses before you finish graduate school, you could at least mitigate the negative effects of your credit card debt. If your credit card debt resulted from the hard reality that your stipend is insufficient to pay for basic living expenses, please consider taking out a student loan to pay off the past debt and supplement your income going forward so you stay out of credit card debt. While it’s not great to be in student loan debt either, at least you can defer the payments until after you graduate. If your credit card debt resulted from an unexpected expense that is unlikely to recur, you might consider paying off your credit card debt with a personal loan from a bank or with a balance transfer credit card. That way, you can at least get a break on the interest you would have paid while you’re paying down the balance.

If you’d like to learn more about increasing your cash flow and paying down debt, please join the Personal Finance for PhDs Community at PFforPhDs.community. Inside the Community, you will find the recordings of two workshops I gave in August, titled How to Up-Level Your Cash Flow as an Early-Career PhD and Whether and How to Pay Off Debt as an Early-Career PhD. After working through the materials, you will have a plan for how to handle your credit card balance in the short and long term.

When your credit doesn’t matter

The final credit topic I’ll address in this episode is when your credit doesn’t matter and when it does. Once you have attained a great credit score of approximately 740 or above and you keep up your good credit habits, you don’t need to pay much attention to your credit. Keep paying your bills on time and in full, use your credit cards as you would debit cards, chip away at your debt, and check your credit reports for accuracy once per year. You don’t have to actively work on increasing your credit at that point—with one exception. If you are planning to take out a loan in about the next year, it would behoove you to get a little more protective about your credit. I’m particularly speaking about taking out a mortgage, but this would also help you with a car loan or similar. For example, you might stop opening credit cards months or a year in advance of applying for your new loan so that you don’t have any recent hard credit inquiries. You might pay off a smaller debt in its entirety. You might pay special attention to your utilization ratio. Above all, when you start working with a mortgage loan officer, listen to that person’s advice about what to do regarding your credit. They might instruct you to make absolutely no changes. I know that Sam Hogan, the mortgage originator I mentioned earlier, advises his clients all the time about their credit in the lead-up to taking out a mortgage. If you are looking to take out a mortgage in the near future and you want to work with someone who understands PhD income, please reach out to Sam over text or a call at 540-478-5803.

Conclusion

I hope this episode was instructive for you and clarified what steps, if any, you should take regarding your credit as a graduate student, postdoc, or PhD with a “Real Job!”

Outro

Listeners, thank you for joining me for this episode!

pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast. I’d love for you to check it out and get more involved!

If you’ve been enjoying the podcast, here are 4 ways you can help it grow:

  1. Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use.
  2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
  3. Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and effective budgeting. I also license pre-recorded workshops on taxes.
  4. Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

 See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps!

The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

This Postdoc Has a System for Debt Repayment That You Can Follow as Well

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In this episode, Emily interviews Dr. Suba Narasimhan, a postdoctoral fellow at Emory University. Suba and her husband each brought debt into their marriage, and once they both had full incomes, they decided to tackle it together. Suba presents a step-by-step plan for anyone at the start of a debt repayment journey. Emily and Suba discuss in detail how to handle credit card debt, including whether to pay credit cards off with student loans or 0% interest promotional credit cards. Suba doesn’t follow the debt snowball or debt avalanche methods exactly, but rather has mixed the two for a custom solution. Suba emphasizes the importance of being kind to yourself while repaying debt and adopting a nonjudgmental attitude toward your and your partner’s debt.

Links Mentioned in the Episode

Teaser

00:00 Suba: You have to think about this as part of your life. And if you have the ability to preplan and save some money, have a little bit of savings, and also just assume that maybe you’ll have to take on more loan debt. How much could you afford given whatever your loan burden is now?

Introduction

00:26 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season six, episode five, and today my guest is Dr. Suba Narasimhan, a postdoctoral fellow at Emory University. Despite maintaining a debt-free status until midway through her PhD, Suba eventually took on both student loans and credit card debt due to financial emergencies and adverse situations. When she started her postdoc position, Suba and her husband decided to tackle their debt head-on, even though it was very daunting and anxiety-producing. Suba presents a step-by-step plan for anyone who wants to eliminate their debt and shares her own decisions throughout. Listen through the episode to hear her encouraging words on maintaining a positive, nonjudgmental attitude during debt repayment. Without further ado, here’s my interview with Dr. Suba Narasimhan.

Will You Please Introduce Yourself Further?

01:23 Emily: I am delighted to have joining me on the podcast today, Dr. Suba Narasimhan. Suba will be telling us about her debt repayment journey, which I’m so excited to dive into that topic with her. So, Suba, say “Hi” to the audience, please.

01:35 Suba: Hi! Hi, Emily. Thank you for having me.

01:38 Emily: Thanks so much for volunteering to come on. I actually wanted to tell the audience how we met, which was a couple years ago. So, I gave a seminar at UCLA and Suba came up to me afterwards and she said, “I’m so interested in what you do. I kind of want to do what you do. Can we talk further about this?” And we did. We went and we had lunch, and we had this wonderful conversation. In fact, Suba is the one who encouraged me to start this podcast. So, if you’re a fan of the podcast, you can thank Suba for encouraging me at that point when I was really still considering whether it was something I wanted to go for. So, anyway, I just want to say that if you, an audience member, ever see me at your university or at a conference or if you hear that I’m coming, please come up and introduce yourself and identify yourself as a podcast listener or a mailing list subscriber or whatever you are and I would love to talk to you. If I have time in my schedule, I will hang out with you one on one if it’s at all possible. I love to meet people who are in my audience and consuming my content. I want to hear your insights. So, we’re getting Suba’s insights today. I’m really excited about that. So, Suba, will you please tell the audience a little bit more about yourself?

02:48 Suba: Absolutely. And I have to say, Emily’s a great lunch mate, so you all should totally do what she asked you to and come up and chat with her about finance. So, I am currently a postdoctoral fellow at Emory University, and it’s a really enjoyable experience. I am actually originally from the South and wanted to return to the South. And so that’s kind of how I ended up at Emory. I am in the Department of Behavioral Sciences and Health Education. So, that’s a School of Public Health Department. Yeah, it’s a great job.

Where Did You Do Undergrad?

03:31 Emily: Wonderful. And where did you do your undergrad? So, I know PhD at UCLA, and you’re at Emory now for your postdoc. Where was undergrad?

03:37 Suba: So, for my degree, you tend to do a master’s as well before you go on to your PhD. And so I did both my undergrad and my master’s at UNC Chapel Hill. Go Heels! I know, Emily, your rival school.

03:55 Emily: I was going to say, I think we were in the Triangle at the same time for at least a few years. But yes, I will allow that on my podcast. I’m a generous host. Okay. So, let’s talk about your debt repayment journey, which starts with a debt accumulation journey. So, tell us about that phase of your life.

Debt Accumulation Journey

04:12 Suba: So, I was really, honestly, I was very fortunate. I was really good with money for a long time and I was lucky to have had financial help from my parents during college and to have gotten both through my master’s and most of my PhD without accumulating any type of debt, consumer or student loan debt. And it was around the third year of my schooling in LA where I had a ton of unforeseen circumstances happen. So, I had some family illnesses. I had a lot of different difficult experiences happen and it was an emotionally trying time. And then it also became kind of a desperate time in terms of money. And even though I was working quite a bit, I just wasn’t totally making ends meet. And I think that that’s a very common experience for PhDs and can be one way that you really get into using credit cards or using student loans as a way to kind of just live your life. And being a PhD student is also a time in your life where you have to take a break from what might be a better-paying job to finish your degree. And I wasn’t one of these people, but I also think that there are a lot of people out there that probably are also very reliant on just their stipends to make ends meet. So, I think this is a pretty common situation to happen.

Importance of an Emergency Fund

05:44 Emily: We’re going to talk through how you’re remedying that situation. But just for anyone who hasn’t yet come upon that emergency situation in their life, if there’s any way that you can create some margin right now, some cash savings to help you kind of buffer through something like that, please, please take the opportunity to do so. So you don’t have to have this extreme reaction once an emergency does occur. And like you said, the thing about emergencies is that they’re rarely just financial, right? Something else has gone really poorly in some other area of life. Maybe it’s a huge emotional problem or a health problem or something like that. And so not only are you dealing with like logistics and emotions and just your routines being thrown off and your relationships, then you also have this financial component. So, at least what you can try to do for yourself, if at all possible, is to make the financial component of the emergency less of a thing so you can focus your energy on all these other areas of your life that need it at that time as well. So, that’s my soapbox. Okay.

Your PhD is Part of Your Life Journey

06:43 Suba: No, no, that’s a good soap box because one other thing I was going to say is I counsel a lot of students who are trying to enter PhD programs. And one of the pieces of advice I give them is something that I was given before I started my PhD. And that’s to think of your PhD journey or your PhD work as part of your whole life. And so, to also think about your finances at that time. So, one thing that was positive in this was that I had calculated out how much student loans I could take and feel a little bit less burden. So, the consumer debt I took on was unforeseen, but the student loan debt I had already pre-calculated what I thought was the maximum I could do in terms of payments if I got what I would consider just being a postdoc, honestly, in terms of finances is one of the lower-paying jobs that you can take because you’re usually on an NIH salary scale. So, that’s also my soapbox. You have to think about this as part of your life. And if you have the ability to preplan and save some money, have a little bit of savings, and also just assume that maybe you’ll have to take on more loan debt. How much could you afford given whatever your loan burden is now?

08:13 Emily: Yeah. I really appreciate you saying that because I think that if graduate students are not accustomed to taking out student loans, like maybe they haven’t done it since undergrad or they didn’t even do it in undergrad they might not think of turning to student loans in the case of some emergency expenses popping up. But it sounds like you did, like you took on some credit card debt, but then you also were using student loans to get you through this situation. So, can you talk about some of the advantages and also the disadvantages of choosing to use student loans versus just accumulating more credit card debt?

Student Loans vs. Credit Card Debt

08:47 Suba: Absolutely. I mean, one is that your interest rates–it’s always better to ask your university what type of emergency loan protections they have, which all universities do have that. And you can go to the scholarships and financial aid department and ask them about these short-term loan borrowing programs. And they are a lot more straightforward and they’re a lot more willing to work with you than a credit card company, which is a for-profit company, would be. So, I would say, that’s important. And the positive thing about student loans is that there are certain things, if you’re taking out federal loans, that you have access to which is the counseling components and the grace periods. And you can, eventually, if you do have student loans from undergrad or your master’s or some other type, you can roll them together and refinance them, and going through that is relatively painless.

09:54 Suba: And this is not necessarily something you can do with credit card debt. Right? What I would caution people against is if the student loans that you have to take out are private student loans, that then again gets you into this territory of consumer debt. So, I would really think about the terms and conditions of any private student loans that you might have to take out because they are often better than credit cards, but they still come with a lot of stipulations and issues. The problem with taking out a student loan is, unlike credit card debt, if there is something in the future where you have to declare bankruptcy, which could happen–happens to people for all kinds of reasons–you can’t discharge that debt at this point. And you also have to be really cautious if you’re thinking about maybe doing a public student forgiveness program. Sorry, public, what do you call it again?

10:52 Emily: Public service loan forgiveness.

Know the Terms and Conditions

10:54 Suba: Yeah. Which a lot of people in the medical sciences do. You hear a lot about people in medical and nursing programs, and there are a lot of people who are going to go into a nonprofit sector that think about that and it’s still a really viable option. It’s just you have to know the terms and conditions of that program going in so you can’t add to your debt burden without planning for how you might want to pay them off.

11:20 Emily: Yeah, I totally, totally agree with what you’re saying. I mean, when we’re thinking about credit cards versus student loans, federal student loans or private student loans, usually you’re looking at a lower interest rate for the student loans versus the credit cards. So, that’s attractive. But as you said, there’s a real danger point, which is if you ever get to the point where you are thinking about declining bankruptcy, you can’t get rid of those student loans. So, it’s a gamble, either way you go for it. But I really liked your suggestion of trying to access your university’s emergency loan system, which I don’t know about all, but I know that many universities do have that. And it’s certainly spreading, it’s a popular program that’s coming to more and more places.

Emergency Loans on Short Notice

12:00 Suba: And what I was going to say is you can also get those loans in very short periods of time. That’s why they’re considered emergency loans. So, if you know that there’s something that’s really looming on the horizon and even it’s maybe something that might happen to you next week, that could be something you can talk to a counselor about. And I think universities are really trying to be more sensitive about the fact that students, especially PhD students, are going through, you know, life challenges.

12:32 Emily: Yeah. And the thing about student loans is that they do take some time to apply for and acquire. So, it’s not a quick solution, but it might be something that you can set up if you know that you’re going to be holding debt for a longer period of time. I mean, not having to make payments on it, being in deferment while you’re still a graduate student is a really great benefit if it’s just not something that you are able to pay off in the moment. But of course, then you’re not paying it off. Right? So, the interest is accumulating. So, pluses and minuses there. It sounded like you ended up with a combination, then, of student loans and credit card debt.

Life Happens, Cost-of-Living Matters

13:02 Suba: I did, yeah. And one of the issues was, I was going through a lot of stuff and I just didn’t calculate how much I was spending. And I was having to deal with pretty significant emergencies that kind of made me have to travel and things like that. And so, that was how kind of this situation ended up happening. And then I also had some life circumstance changes that were great. Like I moved in with a partner. But you know, even that, any transition, honestly, is tied to money. And I’m living in Los Angeles. Another really big issue that might not be salient for people who live in maybe smaller places or less expensive places, is that the cost of living and especially the cost of rent goes up really quickly and sometimes without a lot of notice.

14:01 Suba: So, I also had to figure out my living situation and move apartments. So, I had a lot of things that really had nothing to do with my school life, which was going fine. And also, I did have a lot of financial help from school and from my fellowships and things like that. I was a fully-funded student. So, these are all, I think in an attempt not to scare anybody, but more to say we’ve got to think about the shocks and the issues that might come up and maybe prepare for them a little bit.

Inflection Point: Debt Talks

14:39 Emily: Totally, totally agree. So, thanks for going through that part of your story. At some point, you were no longer accumulating debt. In fact, you decided to turn it around and start paying that debt down. So, can you talk about the inflection point?

14:52 Suba: Right. And I think that was fairly recent. So, about a year ago, which coincided with me graduating from my PhD program, I also got married, which was great. And then I moved down here to start my postdoctoral fellowship. And my now husband also had a full-time job. And so, we said we think we want to start this next chapter of our lives. And one of the issues that we had sort of minimally talked about during our time together but hadn’t really deeply delved into was putting our finances together. And so, in having that conversation, we sort of said, “Hey, I think it’s time that we start to think really deeply and then have a clear plan about what we’re going to do and get rid of the debt that we are both carrying.”

15:46 Emily: Can you talk about how you went through that and how you tackled it, maybe for one of your peers listening here who is also facing a mountain of debt, a lot of different types of debt and doesn’t quite know how to start?

Tackling Debt Conversations

15:58 Suba: Yeah. I think the first step is to have a conversation and it’s usually one person says something like, “I’m totally scared about this debt, or I have so much debt and I don’t know what we’re going to do.” So, again, we opened up our finances to each other and said, “Hey, you know, we’ve decided to share a life together. What’s the most important thing that you want to do in the next five years? Like, what is the most important thing you feel like you want to spend money on? And why do you think, you know, getting rid of that debt would help?”

16:32 Suba: And so, having that discussion really made it sort of a positive and nonjudgmental environment to start having these conversations about money, which can be really anxiety-producing. And so, for me, making up these spreadsheets and having a plan and stuff was really energizing. I was like, “Okay, I am solving an issue.” For my husband, it was super anxiety-producing. It just created this feeling of like, “I don’t make enough money. I don’t know what to do.” You know? And so, also stopping at certain parts of this process. It may take, you know, more than one conversation to get to this point. And saying, “Okay, you know, the whole goal of this is not to stigmatize either one of us for bringing what we brought into the relationship, right?”

Dreaming, Not Blaming, Together

17:20 Emily: I like that – I just want to jump in and say, I really like that you started that conversation and are framing it around–I’m going to phrase it differently than you did–around dreaming together, right? Because as you just said, it puts this whole thing in a positive light. It’s not, “Oh, you know, sniping at each other, blaming each other for, you know, what’s happened in the past.” It’s, “No, like we’re standing together, we’re looking to the future. What do we want our bright future to look like? Let’s agree on that. And, okay. What are the steps we have to take to get to that point? Now, let’s tackle it.” But as you said, for some people it can feel like such a big thing to be working on. So challenging, like for your husband that it sounds like he wanted to shy away from it. Right? Whereas you wanted to charge toward it.

18:04 Suba: Yeah, it took different conversations to get to a point where–you know, and the honest truth is, he had less debt than I did. And so, the way I was feeling was, you know, a lot of blame and kind of shame. Or like, why, how did I bring this into our home, you know, kind of thing? And I think that that is a pretty common feeling for a lot of people. I don’t know anybody who’s had this conversation that hasn’t felt all kinds of feelings about it, you know? And so, I think from those big picture conversations you can also kind of talk about priorities. So, maybe one of you likes to travel more than the other. And so, setting up this idea of, “Okay, we’re going to decide that we want to take this many vacations a year or maybe we want to go to this many friends’ weddings a year, that’s important to us. We want to go home for Christmas or for New Year’s or things like that.” You know, like these are kinds of things that flow out of those conversations. What’s important to you, what’s your priority?

Allocating Money Toward Retirement

19:15 Suba: And we disagree on lots of things about spending money. It’s just we’ve allotted the parts of the money that we agree on so that we have this freedom, you know. So, one interesting thing about us is actually we don’t have a joint bank account. We still have separate bank accounts, and we’ve discussed maybe, but we have a joint savings account. And so, we’ve discussed how we allot money into our joint savings. And then we’ve also even talked about how we are going to allocate money towards our retirements because we look at those as shared money. And then after we’ve paid the bulk of our bills or whatever, the leftover that we haven’t allocated is our own money to spend the way that we feel. So, I think it’s also a balance between getting yourselves on the same page, making a shared priority list and plan, but then also saying, “Well, I don’t need to know and account for every dime that you’re spending. If you like to spend money on X thing and I don’t understand it, that’s okay. I don’t need to.” So, it’s not about controlling the other person, either.

Commercial

20:34 Emily: Hey, social distancers, Emily here. I hope you’re doing okay. It took a few weeks, but I think I have my bearings about me in my new normal. There is a lot of uncertainty and fear right now about our public and personal health and our economy. I would like to help you feel more secure in your personal finances and plan and prepare for whatever financial future may come. You can schedule a free 15-minute call with me at pfforphds.com/coaching to determine if financial coaching with me is right for you at this time. I hope you will reach out, if only to speak with someone new for a few minutes. Take care. Now, back to our interview.

Cataloging Debts

21:21 Emily: Okay, so first step was, “Let’s look at the picture. Okay. Let’s dig our heads out of the sand and look at what is the debt.” Okay. So, what did you do after that point?

21:30 Suba: Absolutely. We cataloged all the debts and the cataloging of this plan. So, essentially, we did create a full spreadsheet at this point of all of the debts, the interest rates, and what types of debt they were. So, was it student loans or consumer debts? And then when interest rates would either change or when they would kick in. And in terms of the consumer debt, one thing that I did was I called the credit card companies and I tried to get my interest rates lowered and be as nice as possible. And it did work for a few of them, actually, honestly. So, don’t be afraid to ask. The worst that can happen is that they say no and you can ask to be kicked up to people who have a little bit more power than maybe the receptionist that you talked to on the phone. And if you do it in a kind way, it works out. And then I also looked at the balance transfer offers that some of my credit cards had. And I would not say, like, open another credit card to do this. I would say, if you already have existing cards, many of them have balance transfer offers and they do charge a fee. So, weigh that fee against the amount that you save in interest by paying it off in the 0% period.

Strategically Using 0% Financing

22:54 Emily: I’m going to ask you a little bit further about this because I’ve never gone through this process myself. So, I want to know a little bit better. So, what you’re talking about is, you have an existing account open, and that account, you know, you see that they’re offering a 0% financing deal, 0% period. And so, what you’re doing then is you’re using that financing to pay off a different credit card balance, right? So, you’re sort of transferring the balance over to the other card that you had open that had that 0% offer. And then the offer is, “Okay, we’re not going to charge you interest for a given period of time.” Usually, it’s like 12 months or 18 months or something like that. What was it in your case?

23:28 Suba: It was 18 months. I only did the ones that were 18 or 22 months. So, the longest period. But you have to do this very strategically. What you don’t ever want to do is to be using these as another crutch so that you can kind of just not pay things off. So, I would then strategically plan to pay per month this amount off a few months before the end of the period. And so, that also gets to my next point. Part of after cataloging your debts, you have to catalog also the salaries that are coming in and the expenses. So, you have to see what your margin of expenses to your income is so that you can make a reasonable plan for your debt payoff.

Making the Minimum Credit Card Payments

24:23 Suba: You shouldn’t use any of these strategies in terms of your credit cards until you figure out, “Can I at least make the minimum payments on my credit cards? And then now I want to make more of a payment on either my credit card or my student loan.” If you’re having trouble making the minimum payments, I would absolutely say call your credit card companies and tell them, “Hey, I’m having a lot of trouble making my minimum payments.” Credit card companies want your money, and it’s better off that you don’t miss your payments because that can affect your entire credit history really negatively. So, these are, these are kind of things you have to do in tandem with one another. You have to catalog your debts and the times in which your debts need to be paid off. But then you also will have to catalog your expenses versus your income to see what’s a comfortable and reasonable amount for you to put towards paying off your debt every month. So, just to say, you had asked me before if I used a debt snowball versus debt avalanche. I think we are a little bit of a combination.

Debt Snowball vs. Debt Avalanche

25:35 Emily: Let’s pause and define that for the listeners who don’t know. I’ll just say, so in the debt snowball and the debt avalanche methods, which are these two very popular methods for repaying debt, repaying multiple debts, you usually pay the minimums on everything and then you make a list of your top priority to your lowest priority debts. And with all the remaining money you have to throw towards debt, you throw it at your top priority. This is in both systems. In the debt snowball method, the top priority is the debt with the lowest balance. And in the debt avalanche method, the top priority is the debt with the highest interest rate.

26:11 Emily: So, debt snowball, you move from smallest balance to largest balance, paying each one off in full. And then moving on to the next one. Debt avalanche method, paying the highest interest rate first. And then once you pay that one-off, completely moving on to the one with the next highest interest rate. The debt snowball method, the sort of reasoning behind it is that it’s very psychologically motivating to be able to cross that small debt, that first small debt off your list and you know, feel like you’re making a lot of progress and move on to the next one. Versus the debt avalanche method is mathematically the most optimal way to go about things. If you were to throw the exact same amount of money into both methods, the debt avalanche method would get you out of debt the fastest. So, go ahead and explain, between those two extreme models, what you actually did.

26:53 Suba: So, I’m still in the process of this. So, I also don’t want to say, “Look at me, I’m debt-free, and I could give you all this advice.” No, we’re still in the process of this and it’s been really fruitful for us. But we started off with the debt avalanche method. So, we wanted to pay off these highest interest debts first and within the reason of the amount of debt pay off that we could do per month. Right? And then when we would get to a certain threshold, so maybe it was a thousand dollars or $500, we would pay off that card or that debt in full. And that gave us, on some months, that would give you just like an extra boost. You know, it just makes you feel good to see that zero balance. And when you pay off a piece of a student loan, they send you a congratulations email. So, that doesn’t hurt too badly, either.

Prioritizing Interest Rates

27:46 Emily: So, I want to clarify because some listeners may have this question. So, if you have at least one, maybe multiple credit cards where you’re currently in a zero interest rate promotional period, does that become a low priority for you or is that still a high priority because the eventual interest rate is going to most likely be quite high? Can you talk a little bit about that?

28:09 Suba: So, I prioritize by the time that the interest rate would change and turn into the higher debt rates. So, say it was January 1st, I would make a plan where I would subtract two months from that, so November, and then I would calculate how much per month I would need to pay on that card to pay it off in full by that November. So, it doesn’t necessarily become a low priority or a higher priority. For some debts, you can’t change the interest rate, right? So, any of those debts would be the debts I would pay off the soonest if I can, or pay off the largest amount. I also thought a lot about how much debt I was carrying per card.

28:57 Suba: So, in one situation, I essentially didn’t have that many credit cards, right? So, one of my cards was more than 30% utilized, which is a lot, and that’s not very good for your credit score, either. So, my goal was to get that less, like lower than 30%. So, I prioritize basically based on the highest debt, and then when the interest rate would change from 0% to whatever it was. And it’s also really important, I don’t want any of your listeners to like go willy nilly and start moving their money around to 0% interest credit cards. That’s a strategy to be used when you need extra time and you have to really make a very clear plan that’s very reasonable to get that done and see what the fee is versus how much benefit you get. So, the fees always range from either 2% to like a minimum of a certain amount of dollars. So, you have to see what that is for each of your, you know, things. And I would definitely call credit card companies first and see if you can lower the interest rate before you change anything.

Automating Debt Payments

30:21 Emily: Okay. What’s your next thing that you did, or your tip for someone else facing this challenge?

30:27 Suba: So, I think, you know, I talked about how you should catalog your expenses towards your income and then figure out what’s a percentage of your paycheck per month that you’re going to put to your debt. And then you want to automate that. So, you basically want to be making a specific payment. And you can either do that, if it’s on your credit card, you can put the payment to a specific date or if it’s to your student loan servicer you can make sure that the check for your student loan comes out of your bank account at the same time.

31:02 Suba: So, you want your income to come in and then that money to go out almost immediately. So, you almost don’t see it, right? So, the reason I say, you know, and this isn’t like news, you know. Automating your finances helps so much because it lowers the stress of you having to keep track of it. But it also tricks you a little bit, psychologically. You never see that money after your paycheck comes in. So, you don’t feel like you have it, right? It’s already gone. It’s already been pledged to something. So, I think that helps.

31:39 Emily: I totally, totally agree. I’m a huge fan of automating, paying yourself first. Absolutely. Go ahead.

Paying Yourself First

31:42 Suba: Yeah. And, you know, there’s been a little bit of discussion sometimes too towards this idea of paying yourself first, right? And I think a lot about that. When you’re starting your first jobs after your PhD and even, you know, some postdocs and fellowships allow you to pay into their retirement system. If there’s a way you can think about putting some level of money per month into retirement, even if it’s just $50 a month or something like that. And that’s something that doesn’t seem astronomical. That’s also an important part of this calculation. And I think there’s a lot of debate on whether you should go whole hog and pay off your debt first and then think about your retirement. And people have all kinds of philosophies. I’m, you know, a moderate. And so, I think you have to live your life. So, you want to try to take advantage of the systems, the positive systems, that you have at the same time. So, my husband and I also looked at our retirement plans and factored in how much money we could put pretax and then put post-tax, if that was possible, into Roth IRAs. So, we thought about that in this whole system as well.

32:58 Emily: Absolutely. We are focusing on talking about debt right now, but once you get certain interest rates of debt eliminated, once those rates, you know, anything you have remaining is sort of in, as you were kind of just saying, a more moderate range, maybe six, seven, 8% or less. That’s the kind of time where you can start saying, “Okay, maybe we should do some retirement savings, not just the debt repayment.” But, to emphasize, if we’re talking about credit card debt, get rid of that credit card debt. Okay, go for that first.

Plan for the Future

33:25 Suba: That should be number one. Absolutely. And I think the next thing that we did then is to think about possible future changes and issues that could come up. So, you know, changes could be things like, “Well we have to prepare for making sure we go visit our family during the holidays or that we have to buy Christmas presents or things like that.” So, kind of trying to figure out what are the issues that we have had in the past that we didn’t prepare for? How can we prepare for them now? So that, you know, that’s an ongoing conversation that’s part of this.

34:08 Emily: I think that’s a really important thing to bring up, especially again for grad students and postdocs who don’t have large amounts of cash flow going through their bank accounts. Because there are going to be months where you have some larger expenses. So, to be able to save up that cash, to handle that at that time, that’s going to prevent you from, again, turning back to the credit card. So, it’s still kind of about debt repayment or debt avoidance to have that cash saved up, again for people who couldn’t easily absorb one of those large expenses in your monthly cash flow.

Small Changes, Big Differences

34:40 Suba: Absolutely. And even if it’s just, you know, a small amount that you put away every month. Again, we’re not having to think about these things in huge dollar amounts. I think sometimes what gets people a little bit down or can be very frustrating is this idea that these have to be very large amounts to make a difference. They don’t. Even if you have a buffer of a hundred dollars and you don’t put that hundred dollars on a high-interest credit card, that’s better. That’s why people have emergency funds. And so, it’s going to take a little bit of preplanning and it’s going to take some time, too. And even if you don’t have much of a buffer and that’s not something you’re able to do, that’s about the situation as well. So, that’s okay as well. It’s just you plan, you say, “Okay, when these credit cards are paid off or when the student loan is paid off, then that money that I’ve allocated towards the credit cards and student loans will now go to another priority.”

35:50 Emily: Exactly. And this goes back to the earlier part of our conversation where we were talking about looking forward into the future. You know, “What does my life, what do I want my life to look like this year, in the next five years, whatever it is?” Part of that is planning, “Okay, I’m going to be doing this type of traveling.” Guess what? Holiday gift-giving season comes up every single year at the same time. We know it’s there. So, yeah, just looking even ahead a few months or a year and just figuring out, “Okay, what are these life things that are going to happen?” They have to be part of the plan as well.

Positive Rewards (Treat Yo’ Self)

36:19 Suba: And part of this too is, just as you prepare for these issues that might come up, you’ve also got to give yourself positive small rewards. And so, what my husband and I did was we thought about things that we could give ourselves as a reward that didn’t involve us spending money. So, maybe once we got to a certain place, we went to like a new park in a city. And you can also prepare in your budget if there are things that cost money, like you want to buy a coffee every morning, you know, you put that into your budget. That’s your small reward for living life as a human being. I think my whole debt payoff philosophy is that you’ve still got to live your life, you know, in the most enjoyable way that you can.

37:12 Suba: Yeah. And another thing is, you can have a potluck with people without telling them the reason why. You know, like that’s another thing. Sometimes you can create a celebration and you don’t necessarily have to tell them, “Well, it’s because I paid 5% of my consumer debt off.” Right? Like that’s still a way to mark something positive and create a positive memory. And you know, things like that, they don’t cost a lot. And so, that also helped keep us motivated. So, we would say, “Okay, well we will save this treat until we get to this point.” And we tried to vary the different kinds of things that we would do.

Business Meeting Times

37:59 Suba: And one of the last things is we created kind of a business meeting time. So, I think one of the issues that happens when you start to get into this mindset of paying off debt or tracking things is that you think about it a lot. And especially if you’re somebody like me who really likes spreadsheets, you’ll be looking at it on your computer all the time and thinking about ways you could optimize. That’s not the best, I think, way to go about it because it can also become negative. You can start to look at the numbers and feel like things are not really moving that much. So, we would create a business meeting time when we would talk about these money-related issues or debt payoff issues. And then the rest of the time we would try not to bring it up. So, having that protected time to talk about it also meant that your entire relationship isn’t really consumed by it. And then also your own thinking throughout the day when you’re working and things are happening, you’re not thinking about it all the time.

39:10 Emily: Yeah, I totally agree with that. I’ve heard the strategy of having a business meeting with your spouse or whatever. And I’ve also definitely heard the strategy of compartmentalizing difficult subjects into, as you said, a time on the calendar. Like you know it’s designated that you’re going to think about it or you’re going to talk about it at that time. It helps it from bleeding into all the rest of your life. So, I really like your combination of those two ideas.

Make it a Positive Environment

39:31 Suba: Yeah. I think when it can kind of create anxiety and worry, and if anyone is prone to anxiety or worry, it could just like snowball into a lot. And you want to treat that time to be a time when other things are not as stressful. So, if you know, maybe like it’s after your kids have gone to bed or it’s on a Sunday because you know like on Sundays you don’t have as much to do, and you want to make that situation as positive as possible. So, sometimes we would like open a beer and sit down or something like that. Just like, make it a positive environment and start off the discussion in a positive way as best you can because these topics are difficult. And every month you may not see progress, right? So, there are things that happen. That’s the other thing. You may have all of these great plans in place and then one month you have to cut down a little bit on paying debt because you have another expense, you know? And so, those are kind of the times when you can have these conversations.

40:43 Emily: Definitely. Again, I love that you’re bringing up any way you can to put kind of a more positive spin on what is fundamentally a really hard situation to be in.

Be Kind to Yourself and Others

40:53 Suba: I guess in the last tip I would say, and I think I’ve said this throughout, is you have to be extremely kind to yourself. I think debt is incredibly stigmatizing. And I feel like I’m somebody who follows a lot of financial blogs and a lot of financial people online. And I think one of the things is we cannot be mean to ourselves or other people about their choices around money. Everybody’s choices are really, really different, and it’s very normal. Especially in this day and age when when people’s jobs are changing so much and maybe they’ve had different circumstances that the only real way to be empowered is to first normalize the fact that this is something that is part of your life. It’s something that happened to you because of a certain set of circumstances, but it’s not something that you can’t control. It’s not something that you eventually can’t get over, you know? And the only real way to be like, I think, empowered is to let go of some of the stigma, especially towards ourselves. We can be really unkind towards ourselves when we make, you know, choices that we don’t think are the best. We should be able to talk about these things a little bit more. And get advice from one another about how to tackle some of these things, even though our situations aren’t the same.

Best Advice for Early-Career PhDs

42:16 Emily: Yeah. And that’s exactly what we’ve done with this interview. And so, Suba, thank you so much for putting yourself out there. So, I like to end with this one question for all of my guests, which is what is your best financial advice for another early-career PhD? It could be related to the conversation we’ve had today, it could be something totally else.

42:34 Suba: I think my best advice is probably two things. One is try to plan, preplan, for changes in your life as much as you can, as best you can. And then the other is it’s never too late to start improving your finances. It doesn’t matter if you are $10,000 in debt, $200 in debt or a hundred thousand dollars in debt. You know, just figure out what your priorities are and see if you can align your priorities with what you want your financial life to look like in the future.

43:08 Emily: Yeah. I don’t want anyone to feel discouraged about debt numbers. I mean even you can look back through the archives, this podcast and I’ve had several interviews with people who are paying off six figures worth of debt successfully. So, it can be done. It does take work, it takes a positive attitude, Suba as you were just saying, it takes organization. But you know what, grad students and PhDs, we have some of those qualities in spades. So, this is definitely something that is tackleable for our community. And again, thank you so much for talking about this topic today on the podcast.

43:40 Suba: Yeah, thank you. Thank you for having me.

Outtro

43:43 Emily: Listeners, thank you for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, please consider joining my mailing list for my behind the scenes commentary about each episode. Register at pfforphds.com/subscribe. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC. Podcast editing and show notes creation by Meryem Ok.

 

Can and Should You Refinance Your Student Loans During Grad School?

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One of the most talked-about topics within personal finance in the last several years is student loan refinancing. Student loan refinancing is taking out a new private student loan and using it to pay off your old student loan(s), federal or private. The student loan industry is being disrupted by traditional banks, peer-to-peer lenders, and technology companies. Combining those new players with the current low interest rate environment has produced incredibly low-cost alternatives to the standard student loans that have been issued over the past decade or so. Current graduate students with student loans from undergrad or grad school may be looking at these new options with great interest, especially because of pervasive advertising by one of the industry leaders.

refinance student loans grad school

A version of this article originally appeared on GradHacker.

But is student loan refinancing advisable or even possible for graduate students? Below are several questions graduate students with student loans may be asking when exploring refinancing.

Is the Refinanced Student Loan a Better Deal than Your Current Student Loans?

First and foremost, you should only consider refinancing your student loans if another lender will give you a better deal than the one you currently have. This better deal will almost certainly be defined by a lower interest rate on the debt, although there may be other reasons to switch if the interest rates are close, such as locking in a fixed interest rate or lowering your monthly payment. If the new loan involves an origination fee (many do not), you must make sure that the decrease in interest rate justifies the up-front fee.

When you take out any new debt, you must read the fine print associated with your loan very carefully. This is especially true for student loans, as even private lenders may offer a few perks not available for other kinds of debt, such as a grace period or forbearance. For refinancing student loans, you need to have a full idea of what both your current lender and your possible new lender are offering you so you can be sure you are not forgoing any relevant benefits.

Can You Defer Refinanced Private Student Loans While You Are in Grad School?

One of the major benefits of federal and many private student loans is the option to defer the loan payments while you are enrolled in graduate school. When your student loans are deferred, no payments are due, though interest will still accrue if the loans are unsubsidized. Deferment is likely one of the perks you want to preserve through your refinance unless your loan payment amounts will be so small that you can easily manage them on your stipend. Chances are that in-school deferment will be available if you are creating a new student loan, though you should carefully check on this with each lender you are considering, including possible limits on the deferment term.

Should You Ever Refinance Federal Student Loans?

If you refinance federal student loans, you will almost certainly give up access to the unique benefits that the federal government provides, such as flexible repayment and forgiveness. If you think there is a possibility that after graduation you will 1) need, based on your income, to extend your repayment term to lower your monthly payment or 2) both enter a career field (e.g., public service) that is eligible for forgiveness and want to take advantage of that option, you should probably not refinance your student loans at this time.

That isn’t to say that you should never refinance federal student loans. If you are confident you won’t need any of the flexible repayment options, getting a lower interest rate on the debt now makes more sense than preserving the option to lower the monthly payments. The latter would almost certainly result in you paying more in interest on your loans both because of the presumably higher interest rate and the extended repayment term.

Some federal student loans are subsidized, which means that the federal government is paying the interest on the loans while they are deferred. (Starting in 2012, all graduate student loans are unsubsidized, though subsidized undergraduate student loans are available to qualifying students.) Refinancing subsidized federal student loans means that the interest rate would go from effectively 0% to a higher interest rate; while the subsidized federal student loans are deferred, it seems unlikely that any private student loans would be a better deal.

Can a Graduate Student Refinance Student Loans?

As in any refinancing process, to get a good deal the borrower must have a sufficient income and good credit. Both of these requirements demonstrate the ability to repay the debt. Some lenders may have explicit minimum incomes and/or credit scores, while others may consider a more holistic picture of the borrower and the debt.

The likely sticking point for graduate students is going to be the income requirement. In general, the most attractive refinancing offers come from lenders who require high incomes and/or low debt-to-income ratios. Graduate students with high debt loads who earn typical stipends will probably find themselves ineligible for refinancing until they start earning more money after graduation. However, it doesn’t hurt to check on the published minimum salaries or even apply for pre-approval from a few lenders (as long as the process doesn’t involve a hard credit pull) to see if you are eligible.

While refinancing student loans to a lower interest rate is helpful, it is not a cure-all when it comes to surmounting your debt. You still have to actually work through the payoff process. One of the downsides to refinancing (or consolidating) student loans is that it gives you the impression that you’ve done something to get rid of your debt, when all you’ve really done is reshuffle it. But as long as you are still willing to pay down your debt energetically, either during or following grad school, and you are not giving up any relevant benefits, refinancing can save you quite a lot of money over the long term.

Have you considered refinancing your student loans?

Eliminate Debt Before You Start Graduate School

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Here’s the thing about debt: When you have a low income, you think that you have to use debt to purchase the things that you/need want. Buy now and spread your payments out over time! But here’s the thing about having a low income: you can’t afford to tie up your limited income with debt payments. If you are about to enter graduate school, which for most people is an unambiguous period of low income, you should do everything in your power to avoid taking on debt and eliminate the problematic debt you already have.

eliminate debt grad school

The Trouble with Debt Payments during Graduate School

The stipend you receive in graduate school isn’t intended to be remunerative. I like to say that the universities expect us to research for free, so they pay us just enough to keep us from taking outside jobs. (That is, for the graduate students who even receive a living wage – many don’t.)

If you’re lucky, your stipend is commensurate with or slightly above the living wage for your county. That is, you hopefully will be able to pay rent, eat (in), and get around town, and perhaps you can afford another modest expenditure like visiting your family, saving a little, entertainment, or some shopping. Have you ever heard the old joke about college: “Sleep, study, socialize: Pick two.”? Well, apply that to your finances in graduate school. “Basic living expenses, a splurge here and there, and saving/debt repayment: Pick 1-2.”

I’m being slightly hyperbolic; there is obviously a range of financial situations in graduate school, but you will almost certainly be in one of these (assuming you aren’t being supported by someone else):

  • Your stipend isn’t enough to cover basic living expenses, let alone debt payments – you’re going further into debt or spending some time working an outside job.
  • Your stipend can give you an okay lifestyle as long as you don’t have debt payments.
  • You could afford debt payments on your stipend if pressed, but there are a lot of other things you’d rather do with it (e.g., lifestyle upgrades, saving).

Knock Out Your Debt Before You Matriculate

If you are planning to start graduate school next year or soon, take the next few months to eliminate your debt or at least reduce it as much as you can.

If you can’t eliminate all of your debt in that time frame, you have to triage! Sort your various debts by priority level and work on them from highest priority to lowest priority. (This method is a hybrid of the snowball and avalanche methods of debt repayment.) The objective is to minimize the debt payments you need to make during graduate school, which means eliminating certain kinds of debts entirely if possible.

With this method, you will pay the minimum balance on all of your debts and throw as much money as you can scratch up toward the top priority debt. Once you have eliminated that debt completely, you move to the next top priority debt and throw everything you can at it. Concentrating your efforts like this gives you the best chance of paying off a single debt completely, therefore eliminating its minimum monthly payment and lowering the total amount of money you are required to pay monthly toward your debt once you start graduate school.

Low-Balance Debt: Higher Priority

The easiest debts to eliminate completely are those with low balances. If you have any debt balances under $1,000 or a few thousand dollars, those should become a high priority because they are possible to eliminate completely in just a few months.

High-Interest Rate Debt: Higher Priority

Also a high priority is high-interest rate debt because that is the debt that is growing the fastest and costing you the most money overall. For example, if you have two debts both with balances of approximately $1,000, you should prioritize the one at the higher interest rate.

Deferrable Student Loans: Lower Priority

Check with your lender to be sure, but student loans should have the option to be deferred while you are in graduate school. Since there would be no minimum payment due on these loans once you matriculate, they are a lower priority to pay off before you start graduate school.

However, that does not mean that you should ignore them completely prior to or during deferment. Unsubsidized student loans accrue interest even in deferment, and it is common for student loans to have a moderate to high interest rate.

If you eliminate your higher-priority debt and can start paying your student loans down before graduate school, definitely do so, starting with the highest interest rate loan.

Mortgage: Zero Priority

If you’re near the start of your home ownership journey, I’m betting there’s no chance you can pay off your mortgage in just a few months. (If that assumption is wrong, go for it!) Mortgage debt will therefore be in your life during graduate school, so prioritize paying off basically any other debt before you start making higher-than-the-minimum mortgage payments. However, if you do own a home, you need to check that you will still be able to afford the payment once you switch to living on your stipend. Selling your home, renting out your home, and renting out bedrooms in your home are all good options if you can’t afford it on your stipend.

Dump Collateralized Debt that You Can’t Afford

You may discover, as you look at your stipend offer letter and add up your minimum monthly debt payments (taking into consideration what you can eliminate before you start graduate school), that you either can’t afford all of your remaining payments or that maintaining all of them would financially paralyze you during graduate school (no fun, no saving).

Your best option in this case is to eliminate your collateralized debt, which is your debt that is against a specific asset that you own, such as your home or car. A very accessible scenario is if you bought a car and took out a car loan based on your previous higher salary, and now that car payment is far too high for your lower stipend. A simple fix is to sell your car, pay off your car loan, and buy a less expensive car (ideally without debt). You may “lose money” by doing this because you owned the car over a period of steep depreciation, but that consequence doesn’t change your inability to afford the payment on your stipend.

“But I Don’t Have a High Income Now to Pay Off My Debt!”

The advice in this article applies to practically anyone who is about to start graduate school and not currently in graduate school, even college students.

Certainly, if you have a higher-than-a-stipend salary right now, start cutting back your lifestyle to what it will be during graduate school and use the cash flow you generate to pay off your debt. You have to do it pretty soon anyway, so you might as well make your transition to graduate school less of a shock by acclimating yourself to the necessary frugality and eliminating as many minimum payments as you can.

However, even if you have a low-to-non-existent income right now, e.g., you are in college, you still have time on your side. Yes, you need to keep your grades up until graduation. Yes, you should enjoy your last few months with your college friends. But you still almost certainly have more free time now (and especially over the summer!) than you will once you start graduate school. That time can be used to generate a side income that you can immediately apply to debt repayment. Bonus points if you can establish a side income that you can continue during graduate school (time permitting), such as online freelance work or passive income.

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Don’t Forget to Save

One caveat: Don’t become so focused on debt repayment that you forget to save up some cash. It’s very helpful to have a small amount of savings available to you during your transition to graduate school, particularly if you have to move. There are a lot of expenses involved with moving and establishing a new residence and possibly fees to be paid to your university, plus most graduate students have to wait rather a long time (over a month) before their first paycheck arrives. It does you no good to work so hard to eliminate your problematic debt only to turn to a credit card because you have no savings for the transition.

Further reading: Bring Savings to Grad School

How intense you need to be in your debt repayment relates to how much high-priority debt you have and your ability to repay debt during graduate school. The more debt you have that is possible to eliminate entirely and the lower your stipend relative to the local cost of living, the more essential this process is to complete prior to matriculation.

Options for Paying Down Debt During Grad School

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A version of this post was originally published on GradHacker.

During my presentations on personal finance for grad students, I am frequently asked about debt – more specifically, when and how to pay off debt. Debt often appears to be an attractive option for low-income individuals like graduate students because it can enable you to “buy now, pay later” – acquire possessions or experiences now and spread paying for them out over months or years into the future. However, debt is even more of a trap for low-income people than it is for those with higher incomes because a greater percentage of your pay or cash flow going forward is going to be tied up in debt payments. This leaves even less flexibility in how the person uses his money than he would have without the debt.

Many if not most graduate students are in one or more kinds of debt, be it student loans (from undergrad and/or grad school), an auto loan, credit card debt, a mortgage, personal loans, etc. How a graduate student should manage her debt depends on her ability to repay the debt, her personal disposition toward debt, and the type and terms of the debt. Students who are able to pay down debt during grad school must choose their repayment method and balance that goal with other financial priorities.

debt repayment grad school

Ability to Repay

As a graduate student, what is your current ability to repay debt?

If you are taking on student loan debt during graduate school to pay for your tuition and fees or living expenses, any debt repayment you make is essentially trading your existing debt for student loan debt. While using student loan money to repay other debt might be attractive based on the interest rates, keep in mind that student loans, unlike all other debt, are virtually never discharged in bankruptcy. However, if you are struggling to make ends meet, in terms of taking on new debt, student loans are often preferable to high-interest debt such as credit card debt.

However, if you receive a stipend and tuition waiver, you may have the ability to make your minimum debt payments as well as meet other financial goals, whether they are saving or accelerated debt repayment. Students who grasp the power of compound interest will be motivated to cut back on their spending somewhat to put money toward debt repayment or investing.

Disposition toward Debt

People’s attitudes toward debt vary widely. On one end of the spectrum, some people view debt as a useful tool to help you live a better life or build wealth. (These people might be proponents of the permanent income hypothesis and encourage grad students to calibrate their lifestyles toward their expected future income rather than their current income.) On the other end, some people view debt as a dangerous burden that should be repaid as quickly as humanly possible. While you likely fall somewhere between those two extremes, it is important to reflect on how your debt makes you feel.

People who are quite bothered by their debt are likely to prioritize debt repayment over other financial goals. People who are less sensitive to the risk that comes with debt may use a more mathematical analysis to determine financial priorities, perhaps by paying down only high-interest debt before starting to invest for the long term. Any of those decisions are legitimate if they are congruent with the individual’s disposition and the ‘math’ of the situation (the terms of the debt) has also been taken into consideration.

Types and Terms of Debt

While it’s difficult to define any particular type of debt as “good” or “bad,” the terms of your debt should certainly influence how high of a priority accelerated repayment is. The chief term to pay attention to is the interest rate. What you used the debt for should also influence your repayment priorities. In some cases, you have an appreciating asset that collateralizes the debt, such as a home (in most cases), but other debt may have a depreciating asset as collateral, such as a car, or be uncollateralized. The dangerous aspect of uncollateralized debt or debt on a depreciating asset is that you don’t have associated property to sell to completely pay off the debt if it becomes necessary.

Student Loan Debt

Federal student loan debt and often private student loan debt is a unique type of debt because your student status and income can influence the repayment terms. While you are a half-time or more graduate student, you may be eligible for loan deferment, which means that no payments will be due. If your loans are subsidized, no interest will accrue during deferment. If your loans are unsubsidized, interest will accrue during deferment, and the interest will capitalize at the end of the deferment period and become part of the principal.

Deferment is a good option for graduate students because it gives the payer more flexibility to skip or shift around the now-optional payments if it is inconvenient to make them. Students could even save up for long periods and pay down the debt in lump sums. All students should make a plan for loan repayment during and/or following grad school, even those who cannot make progress until deferment ends.

Mortgage Debt

Graduate students who have taken out mortgages on their homes during and since the Great Recession likely have quite a low interest rate on their mortgage debt. The long-term average rate of inflation in the US is between 3 and 4%, which is similar to recent mortgage rates for top borrowers. After you reach 20% equity in your home and stop paying Private Mortgage Insurance, there is not much of a mathematical argument for making more than the minimum payments on the mortgage.

Consumer and Personal Debt

The terms for consumer debt can vary widely. In the current low interest rate environment, it’s not uncommon to have consumer debt at or close to 0%, but it can also easily be at 15-30%. How you prioritize paying off consumer debt may have a lot to do with the interest rate and other terms. Some debt offers come with a no payment or zero interest period of one or more years, sometimes contingent on the debt being paid off in full during that time. The repayment terms for consumer debt sometimes come with catches, so you should carefully abide by them or risk paying large sums of money in interest or hurting your credit score. Debts that are held by a family member or friend may have more favorable terms, but your relationship will be colored by the debt until it is repaid.

While it can be argued that student loans and mortgage debt have been used to buy appreciating assets, consumer and personal debt usually doesn’t have the same positive associations. For this reason, students may choose to prioritize repaying this debt just to get it out of their lives.

Paying Off Multiple Debts Simultaneously

If you have two or more debts that are immediate-priority payoff goals, there are two popular methods for choosing how to prioritize them: the debt snowball and the debt avalanche methods. Both methods work off the principle of intense focus on only one debt at a time.

With each method, you make the minimum payments on all your debts and throw all your excess cash flow at your top priority debt until you completely knock it out. With the debt snowball method, you rank your debts from lowest payoff balance to highest payoff balance and work on the smallest debt first. With the debt avalanche method, you rank your debt from the highest interest rate to the lowest interest rate and work on the most expensive debt first.

While mathematically the debt avalanche method is supposed to get you out of debt sooner (given the same amount of money contributed under each method), empirically the debt snowball method has been shown to get people out of debt sooner because of the psychological motivation garnered from the early win of paying off one debt completely.

Prioritizing Debt Repayment against Other Financial Goals

You likely recognize that there are financial goals other than just paying down debt that you might set during grad school, such as saving a cash emergency fund, saving for short-or mid-term purchases, and investing for the long term. Only you will be able to determine how those goals rank in comparison with accelerated debt repayment, after considering your personal disposition and the math involved with each scenario.

What is your experience with debt repayment during grad school? Which decisions regarding your debt are you happy with, and which decisions do you regret?

Why Pay Down Your Student Loans in Grad School?

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While you’re in graduate school, you have the option of deferring payments on the student loans you have previously taken out. This is a very standard procedure that your lender should have no trouble helping you with once you make the request. Deferment means that you are not required to make payments on your student loans. You are allowed to defer student loans when you are enrolled at least half-time in graduate school.

That’s where many graduate students stop thinking about their student loans. “I don’t have to pay? Awesome!” But just because you defer your student loans does not mean that you should ignore them. Even in deferment, you have the option of making payments of any size you choose on your student loans. Depending on the rest of your financial landscape and the interest rate of the loans, it can be a good idea to pay down your loans while you are in graduate school.

When your student loans enter deferment, you don’t have to make payments but the loans still accrue interest at their given rate. In the case of federal subsidized student loans (which are now only available to undergraduates), the federal government pays the interest for you, so your loans don’t grow any larger. In the case of federal unsubsidized and private student loans, the accrued interest adds to your balance due. When your loans exit deferment, the interest capitalizes, which means it becomes part of the principal due, making your accruing interest and minimum payments even higher.

Interest rate is crucial

The higher the interest rate on your unsubsidized loans, the faster the loan balance will grow during the deferment period. Let’s look at a few examples. Direct unsubsidized loans for undergraduates are offered at 4.45% and direct unsubsidized loans for graduate students are offered at 6% (as of June 2017). Private student loans might be offered anywhere from 3 to 12%.

This table illustrates how much your loan balance would grow at the given interest rate if you made no payments (deferred) for five years.

You can see how much the interest rate itself affects the balance after five years. And remember, interest will continue to accumulate throughout the entire life of the loan! Not making payments just allows the problem to grow larger.

If your student loans are currently deferred, you have a decision to make: Should you make payments on your student loans even though you don’t have to, and what amount should you pay? There are different answers depending on your exact situation.

You can’t pay – period

Some graduate students have no choice here; they are simply unable to make any payments on their student loans. This might be because they are taking out more student loans or consumer debt during graduate school or because their stipend only just covers their bare-bones living expenses. This is a situation in which deferment is sorely needed. The best course forward is to finish graduate school in a timely manner, get a well-paying job, and start repayment when the deferment ends.

You might be able to pay, but you’re reluctant to free up the cash flow

Many graduate students who receive stipends technically have the ability to make payments toward their student loans if they want to, but they either don’t recognize their ability or are unmotivated to make the sacrifice to their lifestyles. When you’re not compelled to put money toward your future, it’s easy to let your lifestyle inflate to your income level.

When you’re dealing with compound interest, like with debt repayment or investing, the question comes down to how much you value an amount of money now vs. a larger amount later. How much larger an amount depends on the interest rate. Yes, it would be a sacrifice to cut $100/month from your budget, for example, to make a regular payment on your debt, and it would almost certainly be easier to sacrifice $100/month out of your larger post-grad school income. But remember that we’re not comparing $100 now to $100 later – more like $100 now with $120 or $140 or $160 later.

What the tipping point is between those two options is up to each individual to decide based on his risk tolerance, post-graduation income prospects, and lifestyle desires.

You have available cash flow, but you’re not sure if it should go toward the loans

Other graduate students have already identified some amount of cash flow each month that they want to put toward their financial goals, but they’re not sure if their loans should be their top priority. Maybe they feel they could also use some additional cash savings on hand or are excited about investing.

As long as the student has a satisfactory emergency fund and/or cash for short-term spending and no higher-interest rate debt, putting the cash flow toward either the debt repayment or long-term investing is a good choice. Which one comes out on top should be determined based on two primary factors: the math and your personal disposition.

The math: Compare the interest rate on your debt with the average annual rate of return you expect on your investments. If your interest rate is much lower than your expected average annual rate of return, that’s a big argument in favor of investing over debt repayment. If your interest rate is comparable to or higher than your expected average annual rate of return, that favors debt repayment.

Personal disposition: How you feel about this investing vs. debt repayment decision matters, too. If you can’t sleep at night for thinking about your looming debt, just work on paying it down. If the math doesn’t sway you strongly to one side and you are super excited about starting to invest, go ahead and do that (but keep in mind that losing money is a distinct possibility).

Remember that subsidized loans are effectively at a 0% interest rate, so repaying those loans would only be a top priority for someone who really hates their debt.

Payment strategies

If you have decided to repay your student loans to some degree during grad school, you have some options on how to do so.

The first is that deferral decision that we assumed at the beginning. Even if you don’t feel you have to defer because you can easily afford the minimum payment, deferring still may be advantageous for two reasons: 1) If something ever came up that prevented you from making your required payment, your credit score would take a hit. 2) With no minimum payment required across all your loans, you can choose to pay down one loan at a time.

Second, assuming your loans are deferred, you can make regular payments or save up for some time and make larger, lump-sum payments. It might be easier to make fewer payments over the course of a year, but if your loans are unsubsidized you would lose a little bit of money to interest accumulation. Talk with your lender to see how willing they are to accept payments of variable amount and at irregular times. For subsidized loans, you wouldn’t be penalized for building up your payoff money in your own coffers up through the entire deferment period as long as you paid the sum before the loans exit deferment.

Third, within your set of student loans, you may have multiple different interest rates, perhaps including both subsidized and unsubsidized loans. If you have decided to commit a certain amount of money to loan payment, you should put the whole payment toward the unsubsidized loan with the highest interest rate (the debt avalanche method).

Pay just the interest

One option that I haven’t yet mentioned is the common suggestion to pay off only the accruing interest during the deferment period so that the loan balance you have upon exiting deferment is exactly the same as the loan balance that you had upon entering deferment. While it is a fine idea to pay some amount toward the loans during deferment, I don’t see a compelling reason why that number should exactly equal the amount of interest accruing. If you have the ability to make interest-only payments, why stop there? You should pay as much as your budget allows.

I do think it’s a good idea to defer your student loans while you are in graduate school. And on top of that, to the greatest extent you are willing you should put your money toward increasing your net worth. Both debt repayment and investing fulfill that goal well, and which one you choose will depend primarily on the math and your personal disposition. The higher the interest rate on your student loan debt, the more compelling the argument for paying it down while you are in grad school.