prospective PhD

Financial Reasons to Work Before Starting Your PhD

January 21, 2019 by Emily Leave a Comment

College students who aspire to earn PhDs often ask themselves if they should proceed directly from undergrad into a PhD program or take a year or more “off” to work. From a career perspective, there are some arguments on either side (and it’s probably field-dependent), though personally I think it’s better to not go straight from college to grad school. However, from a financial perspective, working for at least a year prior to starting grad school is a slam-dunk better choice – provided you handle your salary the right way in the meantime.

I’ll assume in this article that you’re earning more in your post-college job than you will as a grad student. I know that’s not always the case (my postbac fellowship paid a stipend comparable to that of a grad student), and if it’s not true for you, simply pick and choose the advice that works for you.

This article provides financial arguments for working prior to starting a PhD and gives you a strategy to combat the biggest potential downside to doing so. Working before starting a PhD program gives you the best shot at starting grad school (and the rest of your life) on the right financial foot.

Save Cash for Start-Up Expenses

Starting grad school, especially if you have to move to do so, is a cash-intensive endeavor. It can be done on the cheap depending on your city, but you are looking at paying for much or all of this before receiving your first grad student paycheck:

Moving expenses
First month’s rent (maybe last as well)
Security deposits, installation fees, and/or service fees for housing and utilities
All your normal living expenses like food, transportation and personal care for a month or more
Fees (and possibly tuition) if not covered by your program, e.g., parking or an insurance premium
Textbooks and other course-related expenses

Those expenses are similar to any that you would incur if you moved for a job, but in addition you have the educationally-related ones and you most likely will wait over one month for your first paycheck to arrive instead of the two weeks to one month typical for a job.

If you work prior to starting grad school, you have the opportunity to save for those start-up expenses. If you don’t have enough savings available when you matriculate, you’ll start grad school already feeling financially behind.

Build a Strong Financial Foundation

Working prior to starting grad school also means you can improve your overall financial health compared to where you were when you finished undergrad. You can work on one or more of these goals right away:

Saving cash for an emergency fund and short-term irregular expenses
Paying down debt (prioritize high interest rate debt such as credit cards and unsubsidized student loans)
Contributing to a tax-advantaged retirement account such as a 401(k) or IRA

Starting grad school doesn’t necessarily mean stalling financially, but it is easier to make progress with a salary intended to do more than pay basic living expenses.

Further reading:

Investing for Retirement

I already mentioned retirement saving above, but it’s worth emphasizing again. Saving for retirement during grad school is a challenge. This is due primarily to your limited cash flow, but in addition grad students are sometimes disallowed from contributing to any kind of tax-advantaged retirement account due to their income type. If you receive only fellowship income throughout an entire calendar year, you will not be able to contribute to an IRA. It is also exceedingly rare for a grad student to have access to a workplace-based retirement account like a 403(b).

Further reading: Taxable Compensation or Earned Income

Getting an early start on retirement investing will make an enormous difference in your account balances once you reach retirement. For example, if you work for one year until age 23 and contribute $1,000 per month to a retirement account, just that $12,000 contribution alone can grow to approximately $434,000 by the time you are 68 (assuming an 8% average annual rate of return.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

If you have to slow down or stop retirement investing during grad school, you can still feel good about the investments you already have in place that are working for you in the background.

If your employer provides a retirement match, please contribute enough to get the full match! It’s going to be a long time before that opportunity comes around again.

Applying Everywhere that Is a Fit

Grad school applications can easily cost over $1,000 between the direct application fees and indirect costs like taking the GRE. If you are working when you apply instead of doing it during college, you will have more money (and time) to apply and visit everywhere that is a good fit for you. It would be such a shame for a low budget for applications to constrain your career choices.

Further reading: The Full Cost of Applying to PhD Programs

Start a (Passive) Side Hustle

Side hustling during grad school is a great way to earn some extra income, maintain an identity and emotional outlet separate from your research, and potentially improve your post-PhD career prospects. But when you’re busy with research, classes, and/or teaching, it can be difficult to put in the time and energy needed to get your side hustle off the ground.

It’s much easier to maintain a side hustle you established prior to starting grad school (or you could continue some aspect of your job as a side hustle). An ideal side hustle for someone anticipating entering grad school is one that is location-independent and time-flexible.

The perfect side income for a grad student is not a “hustle” at all but passive income. Passive income comes in many forms, but requires an up-front investment of time or money to establish the income stream with little to no additional work required on an ongoing basis.

Minimize Your Tax Burden

In our current low tax environment, I don’t talk about tax planning, that is, changing your behavior due to the tax implications. I don’t like to let the “tail” of tax repercussions wag the “dog” of the rest of your life. However, in this case, I want you to at least be aware of the tax implications of starting a PhD program right away vs. waiting a year or two.

There are two big tax effects of having a “student” status (i.e., being a full time student in at least part of five months in the calendar year) and also being young (i.e., 23 or younger on 12/31 of the year in question).

Dependent

Normally, being considered a dependent of your parents expires at age 18, but students can be claimed as dependents up until the year they turn 24. Generally speaking, being claimed as a dependent is bad news for your tax return and good news for your parents’ tax return (or whoever is claiming you).

There are a few ways to avoid dependency status in the year you exit undergrad and/or the year you enter grad school, all of which can be more easily accomplished by working in between:

Live apart from your parents for at least six months of the year you finish undergrad (assuming you graduate in the spring) and continue to do so until the year you turn 24 (at least).
Wait to start grad school until at least the year in which you turn 24.
Provide at least half of your own “support.” Support is basically all your expenses, both living expenses and educational expenses. If you provide at least half of that support through your own income (taxable fellowships and loans count, but scholarships do not), you are independent. This is much easier to accomplish if you earn a higher income and minimize your educational expenses in any year that you are under age 24.

Kiddie Tax

The Kiddie Tax is bad news for the “kid” subject to it (that’s you, potentially) as it imposes a much higher tax rate on “unearned” income than what you would have on ordinary income. Weirdly and unfortunately, fellowship income is considered “unearned.” If you are a student, under age 24, and do not provide more than half of your own “support” with ”earned” income, your “unearned” income is subject to this higher tax rate. You do not have to be a dependent for the Kiddie Tax to apply to you.

How do you avoid the Kiddie Tax through tax planning? 1) You can wait to start grad school until the year you turn 24. 2) If you start grad school prior to the year you turn 24, make sure you have enough “earned” income in each year you are a student to cover at least half of your own “support.” Keep in mind that “support” includes educational expenses.

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How to Make the Most of Your Salary and Start Grad School on the Right Financial Foot

Have you ever heard the advice to “live like a college student” or “live like a resident?” Take that a step further and “live like a grad student” in your working years prior to starting grad school.

Further reading: Is “Live Like a College Student” Good Advice?

The advantages to living like a grad student when you have a job are three-fold:

You will get a head start on the essential financial skills you’ll need during grad school, such as budgeting, frugality, and saving.
You will rapidly increase your net worth through saving and/or debt repayment because you will be living far below your means.
You will avoid experiencing the very painful process of decreasing your standard of living when you enter grad school.

Living like a grad student when you have a better-paying job is definitely a sacrifice, but it’s one that is well worth it. I often speak to grad students who worked prior to starting grad school, and their common refrain is “I wish I had saved more when I had the chance!”

Before PhD Admissions Season Starts, Discover What a Standard Offer Is in Your Field

November 19, 2018 by Emily Leave a Comment

At this point in the year, you should be (nearly) done preparing your PhD program applications and looking forward to receiving at least one offer of admission. Congratulations on your progress!

If you haven’t already, this is the right time to fully investigate what a standard offer of admission looks like in your field and particularly at the caliber of universities you have applied to. That way, when your offer letters arrive, you can tell which ones are up to the standard and which aren’t. You can also begin to form an idea of what the time management and financial sides of your life will be like during your PhD.

My PhD is in a STEM field (biomedical engineering), and my understanding when I was applying to programs was that I would be fully funded for at least 5 years. This is common in well-funded STEM programs, but more hit-or-miss in other disciplines and at programs struggling for sufficient funding. However, when I was applying I didn’t understand that the source of my funding mattered quite a lot to how I would actually spend my time in graduate school. I wasn’t very discerning regarding that aspect of my funding offers, so this article encourages you to do a better job than I did preparing to understand your offer letters and investigate the funding norms of the programs you’re admitted to, especially for upper-year graduate students.

What Does It Mean to Be Fully Funded?

Have you ever heard, “You shouldn’t pay to get a PhD” or “An acceptance without funding is a rejection”? These statements are valid for many fields (e.g., STEM), but not necessarily all. If you are in one of the fields where it is common to (partially) self-fund or need an outside job, you need to know that to have realistic expectations of your offer letters. If you are in a field that is supposed to fully fund students, you know that offers with partial or zero funding are not ones worth accepting (even if that’s the only type you get!).

What it means to be funded can also vary by field and institution.

The fullest definition of funding is to have your tuition and fees paid on your behalf and receive a livable stipend for all 12 months of the year guaranteed for the entire duration of your PhD. (I didn’t receive any offers that were that generous!)

It’s quite rare to receive an open-ended guarantee of funding as the programs want you to progress toward graduation at a reasonable pace. It’s important to find out if the typical course for a PhD student in the programs you’ve applied to is to be funded until graduation (after a reasonable period of time, even if it’s more than 5 years) or if funding becomes difficult to secure later on in the PhD (e.g., there are 10 funded positions but 15 students competing for them).

While ideally you would accept only an offer of full funding, in some fields that isn’t a norm, and you might not get a PhD in that field if you held out for that. But the other side of the coin is that in fields where full funding is typical, you shouldn’t attend a program that can’t or won’t offer it to you. Either the program is under-funded or you aren’t their priority.

Further reading: Unfunded Ph.D.s: To Go or Not to Go

Do Graduate Students Take on Outside Work or Debt?

A corollary to the above discussion about the degree of funding offered is how students pay for their lives (and tuition and fees) if they don’t receive full funding.

Is it common for graduate students in your field to have outside jobs, either year-round or during unfunded semesters? (Some fields pay stipends only during the academic year, leaving graduate students to their own devices over the summer.)

Do graduate students sometimes take out student loans, and if they do is it to pay their tuition and fees or to pay for living expenses?

You may find variations in these norms across the programs you are accepted to, even within the same field; this is a more difficult subject to investigate, but a very important one. Even if a program tells you that you will receive a year-round stipend all through graduate school, the students will be able to tell you if that stipend is livable or if they are turning to outside work or debt to supplement it.

What Do You Have to Do to Receive Funding?

There are two sources of money for stipends: fellowships and assistantships. When you are granted a fellowship that pays your stipend (or you might be on a training grant), you have officially “no work expectation;” you are free to pursue your classes and/or dissertation with all of your time. An assistantship that pays your stipend, on the other hand, comes with a work expectation between you and your department/university. An assistantship to receive a full stipend is generally 20 hours/week, but some assistantships offer fractional pay for fractions of that time.

There are a few variations of assistantships that are important to distinguish among. A teaching assistantship requires you to teach or assist a faculty member in teaching a course. Research assistantships require you to do research under the supervision of a faculty member; this research could become part of your own dissertation (more common) or be separate from it (less common). Sometimes assistantships are for other types of service around the university, such as an administrative role; these might be labeled graduate assistantships or similar.

In terms of having the maximum time to pursue your PhD, fellowships and research assistantships for your dissertation are superior to teaching assistantships, graduate assistantships, and research assistantships not for your dissertation. The former set allows you to devote all your time to degree progress, while the latter set carves probably 20 hours/week out of your time for non-dissertation-related work. (That’s not to say that the latter set of work might not benefit you in other ways, but whether it does or not depends on your career goals.)

It is imperative to know what kind(s) of work requirement is typical for your field to evaluate your offer letters and have realistic expectations about how you will use your time in graduate school. It’s not uncommon for graduate students to receive funding from different types of sources throughout their PhDs, so don’t assume that because you were offered a fellowship in your first year that it will necessarily continue. In particular, how are students funded once they are finished with classes and ready to sink into their dissertation research (e.g., have achieved candidacy)?

What Is the Time to Degree?

A question for the programs that have accepted you is: What is the average time to graduation? (Bonus: What is the standard deviation?) Make sure that the answers you get from the programs are in line with recent averages in your field.

While a shorter average time to graduation is attractive, make sure it’s because students are actually graduating on time and not just being kicked out for failure to progress if they take too long.

If the average is longer, ask how students support themselves after the fifth or sixth year: Are they still funded or are they on their own?

Where to Find Answers

The best places to find answers to these questions are:

Current or recent students in your field (e.g., alumni from your college, (friends of) friends)
Professors in your field who you already know (e.g., your research/academic advisors at your college)
Administrative assistants at programs you’ve been accepted to
Potential advisors who are courting you (talk about this outside your interview time)
The PhD Stipends database (pay particular attention to the Living Wage Ratio)

Having a baseline of knowledge of what funding packages are standard in your field will help you immensely to read and understand the offer letters you receive.

If you are a current graduate student, please report your field and what a standard offer of admission is in this anonymous 6-question survey!

Eliminate Debt Before You Start Graduate School

March 19, 2018 by Emily Leave a Comment

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.

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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.