Personal Finance for PhDs

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How Will Taxes for Grad Students and Postdocs Change Under the New Tax Law?

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The Tax Cuts and Jobs Act has been passed by both the House and Senate and signed by the president, and grad students are rejoicing that their tuition benefits were preserved in the final version. This is really the first opportunity we’ve had to figure out what the changes to the tax code will mean for graduate students and other individuals. In this post I’m running some numbers for a few different income levels and family configurations that are relevant to grad students and postdocs (similar to this article but for lower incomes). The good news is that it does seem that taxpayers at these lower income levels will see a reduction in their tax burdens as long as they take the standard deduction (or their itemized deductions are within about double of the standard deduction).

2018 tax for grad students and postdocs

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Tax Concepts and Terms

Many Americans don’t realize that our income tax structure is tiered. If your income falls in the 15% marginal tax bracket, for instance, it’s not the case that you pay 15% of your gross income in income tax. Part of your income (the amount that goes into your deductions and (currently) exemption) is not taxed at all. The next chunk of your income is taxed at 10%, and the last chunk is taxed (currently) at 15%. This would continue up the tax brackets if your income were higher.

Further reading: Marginal Tax Brackets, Deductions, and Credits Explained Graphically

A deduction is an amount of money that is excluded from your taxable income. You will choose to take the standard deduction or to itemize your deductions, whichever will give you the larger deduction. There are other deductions that fall outside of the standard/itemized deduction (above-the-line deductions), such as interest paid on student loans (up to $2,500), qualified education expenses if paid out of gross income, and contributions to a traditional IRA. The amount of the deduction multiplied by your marginal tax bracket is the amount that your tax will be reduced due to the deduction. For example, if you are in the 15% tax bracket and apply a deduction worth $1,000, your tax will be reduced by $150.

A credit is an amount of money by which your tax is directly reduced. A credit is worth the same amount no matter what marginal tax bracket you fall in, e.g., a $1,000 credit takes $1,000 off your tax bill. Examples of credits are the child tax credit, childcare expenses credit, and the saver’s credit. Your tax may even be reduced to zero due to credits, and refundable credits allow you to pay negative tax, i.e., receive money instead of paying money at tax time (non-refundable credits stop at a tax liability of $0). Sometimes a credit is applied at a certain percentage, e.g., a 20% credit on an amount up to $1,000 if worth at most $200 but would be less if you spent less on the expense in question.

Changes to the Tax Code in the GOP Bill

There are a few tax policy changes that will affect every American taxpayer, and many more that affect only high-income individuals or individuals in specific scenarios (e.g., taxpayer who previously had a large amount of certain itemized deductions, owners of pass-through businesses). In this post, I’m focusing on changes that will apply to all or many graduate students and postdocs. I have omitted noting at what income levels most of the benefits phase out, instead assuming that graduate students and postdocs will fall under those limits.

In creating this post, I have largely leaned on this great summary of the changes proposed in the GOP tax bill placed side-by-side with the current tax policies. Please note there is a typo in the individual tax rates table ($19,050 is correct, not $19,500).

Standard Deduction

The standard deduction is a set amount of your income that is tax-free. The alternative to the standard deduction is to itemize your deductions, which means documenting one or more types of deductible expenses throughout the year and choosing this deduction type if they add up to more than the standard deduction. (Some of common itemized deductions as of 2017 are medical and dental expenses if over 10% of your adjusted gross income, state and local income or sales tax, property tax, mortgage interest, charitable gifts, and unreimbursed employee expenses.)

One of the stated goals of the GOP with respect to this tax plan was to simplify the tax code, and itemizing deductions is one of the headache-inducing activities that is part of preparing a tax return for some taxpayers (less than 1/3 of households). Raising the standard deduction means that a larger amount of everyone’s income will be tax-free and that many fewer households will have to itemize to receive their largest deduction. However, some types of deductions that previously could be itemized have been eliminated or capped, which could negatively affect taxpayers who heavily relied on them to reduce their tax due. Two of these types of deductions are:

  • the state and local income/sales/property tax deduction is limited to $10,000 and
  • the mortgage interest deduction is now for loan sizes under $750,000.

Exemptions

In 2017, another amount of income was tax-free for each member of your household, which was your personal exemption. If you are single, you receive one exemption; if you are married filing jointly, you receive two exemptions; you also receive one exemption per dependent child. In 2017, each exemption is worth $4,050.

The GOP tax bill eliminates exemptions in favor of the larger standard deduction discussed above. Because the exemption amount scaled with the number of people in the household whereas the standard deduction is only applied once per household, this change is advantageous for smaller households (single, married couple) and disadvantageous for larger households (married couple with two or more children). However, the expansion of the child tax credit, discussed below, offsets this disadvantage for children up through age 16.

Tax Brackets

The lowest three tax brackets shift slightly under the new GOP plan. Their income ranges remain similar though not exactly the same (they change slightly every year anyway). The 10% bracket will still be taxed at 10%, the 15% bracket will be taxed at 12%, and the 25% bracket will be taxed at 22%.

source
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Keep in mind that when you find your marginal tax bracket (the highest tax bracket your income falls into) in these tables, you will use your taxable income less deductions and exemptions.

Child Tax Credit

The 2017 child tax credit is $1,000 per child for households under certain income limits and is partially refundable for some low-income households. In 2018, the child tax credit will be $2,000 under higher income limits and is fully refundable up to $1,400. The child tax credit applies to children up through age 16.

Income Tax Charts

For Single People and Married Couples Filing Jointly

I have created charts of the tax due for individuals and couples with various incomes under the 2017 and 2018 tax laws (assuming no children for now). I assumed the filers would take the standard deduction and no additional deductions (such as student loan interest or qualified education expenses).

Keeping in mind the income ranges of graduate students and postdocs, the ‘single’ table incomes range from $15,000/year to $50,000 with increments of $5,000, and the ‘married’ table incomes range from $30,000 to $110,000 with increments of $20,000.

 Income (x $1,000) 15 20 25 30 35 40 45 50
2017 Tax Due ($) 460 974 1,724 2,474 3,224 3,974 4,724 5,639
2018 Tax Due ($) 300 800 1,370 1,970 2,570 3,170 3,770 4,370

Income (x $1,000) 30 50 70 90 110
2017 Tax Due ($) 920 3,448 6,448 9,448 13,778
2018 Tax Due ($) 600 2,739 5,139 7,539 10,799

Income (x $1,000) 15 20 25 30 35 40 45 50
Single Absolute Reduction ($) 160 174 354 504 654 804 954 1,269
Single % Reduction 35 18 21 20 20 20 20 23
Income (x $1,000) 30 50 70 90 110
Married Absolute Reduction ($) 320 708 1,308 1,908 2,978
Married % Reduction 35 21 20 20 22

Under the above assumptions, graduate students and postdocs across these income levels will see a reduction in their tax burdens between 20 and 35%.

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Adjustments for Children

In 2017, if you have a dependent child under the age of 17, you can take the child tax credit for $1,000 per child. A credit is worth the same across the tax brackets because it directly reduces your tax due. In addition, you can also take an exemption for your dependent child (possibly up to age 23). In terms of the effect on your final tax burden, if you are in the 10% tax bracket the exemption is worth $405.00, if you are in the 15% tax bracket the exemption is worth $607.50, and if you are in the 25% tax bracket the exemption is worth $1012.50.

In 2018, the child tax credit has been expanded to $2,000 per child, but only up through age 16.

Download My Spreadsheet

You can download the spreadsheet I used to make the above charts with the complete tables. I have also included a sheet where you can estimate your own tax due by answering three questions.

Download the Tax Spreadsheet

Sign up for our mailing list to receive the spreadsheet I used to write this post, including a 3-question calculator for your own 2018 tax due.

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Do Your Own Calculations

This post skips over many of the nuances of the current and new tax law, so it does not substitute for plugging your numbers into a calculator (once full ones become available) or the math you will do in preparing your tax return. It is only intended to give an estimate of the tax due for ordinary wage earners (and, I presume, fellowship recipients) in the income ranges relevant to graduate students and postdocs. If you have automatic withholding on your paycheck, you should see changes to your take-home pay in early 2018. If you file quarterly estimated tax, your first payment is due in mid-April, so you have a few months for the IRS to adjust Form 1040-ES and to calculate your new tax burden.

Everything You Need to Know about Roth IRAs in Graduate School

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As you are no doubt aware, graduate students are clamoring for information on investing for retirement. I’ve observed this during my seminars and it’s been documented by the Council of Graduate Schools’ Financial Education. Graduate students are wondering how to get started saving for retirement during graduate school or want to be prepared to start immediately following graduate school. Roth IRAs are an integral component of preparing for retirement for graduate students. This article covers everything you need to know about Roth IRAs in graduate school: what an IRA is, why you should use one, the differences between traditional and Roth IRAs, the type of income you need to contribute to an IRA, how much to contribute to an IRA, and how to open an IRA.

Roth IRA graduate school

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The information in this article is current as of 2023.

What Is an IRA?

IRA stands for Individual Retirement Arrangement. It is a tax benefit offered by the US federal government to incentivize saving for retirement. Anyone with taxable compensation (or a spouse with taxable compensation) can contribute to an IRA; it is not a benefit offered by your workplace like a 401(k) or 403(b). The contribution limit to an IRA in 2023 is $6,500 ($7,500 for people aged 50 and older) or your amount of taxable compensation, whichever is lower.

An IRA is not synonymous with particular investments; you buy investments inside (or outside) of your IRA. An IRA (and other tax-advantaged retirement accounts like a 401(k) or 403(b)) is like a shield that protects your investments from taxes.

If you invest in a regular taxable investment account, every year that you realize a gain you will pay some tax on the gain. This tax effectively suppresses the growth rate you see on your investments, which saps the power of compound interest. An IRA or other tax-advantaged account maximizes that growth rate by eliminating the tax, which ultimately maximizes the amount of money you have in your investments.

However, this tax-advantaged status comes with a trade-off. The purpose of an IRA is to help Americans save for retirement, so there are restrictions on when and for what purpose you can remove money from your IRA. In limited cases, you can remove money from your IRA without incurring any penalty, but in general you have to wait until you are 59.5 years old.

Why Use an IRA Instead of a Taxable Investment Account?

If you were to save for the long-term into a normal investment account, every year you would pay some tax on the gains you realized in the account. If your account had a great deal of turnover in the course of a year, you would pay your marginal tax rate on the gains (10%, 12%, 22%, etc.) plus whatever state tax would be due. If your account had very little turnover, your tax rate(s) would be lower. If instead your money was in an IRA (or a similar tax-advantaged retirement account like a 401(k) or 403(b)), all the gains would be tax-free.

Taxes on a regular investment account amount to death by a thousand cuts. Every year, a fraction of the growth (if there was growth) is removed through taxes and no longer serves as part of the principal for the growth in a subsequent year. Using a tax-advantaged account like an IRA allows the growth to continue unfettered. Over many decades, the balance in an IRA can be hundreds of thousands of dollars larger than the balance in a taxable account to which the same contributions were made.

Further reading: Taxable vs. Tax-Advantaged Savings

For short- or medium-term investing goals, taxable accounts are appropriate because of the complete accessibility of the money contributed. But for long-term investing goals such as retirement, it is very advantageous to use an IRA or other tax-advantaged retirement account.

Why to Contribute to an IRA during Graduate School

Graduate students have a limited income and plenty of claims on that income. They must first and foremost pay for their basic living expenses, which not all stipends can even cover. If there is any money remaining, the student must choose among upgrading his lifestyle, saving up cash, paying down debt, investing, giving, supporting family members, etc. They may very well have higher priorities than saving for retirement. However, there is a very compelling reason for starting to invest for the long term if possible: the power of compound interest aka the time value of money.

As graduate students are most often in their 20s or 30s, time is currently on their side with respect to investing. Many Americans put off saving for retirement until their peak earning years in their 40s and 50s, but the advantage of starting earlier is that you need to save less money overall to reach the same endpoint. This is the time value of money: the money that you invest today is worth more than the money you invest years from now because the intervening time adds value. Investing even small amounts of money during graduate school can massively add to your wealth in retirement, much more so than large amounts of money saved later on.

The mechanism of the time value of money is the power of compound interest.

In qualitative terms, this is how compound interest works: In year 1, you invest some money and it earns a return (we’ll say a positive return, to keep things simple). In year 2, you invest more money which earns a return, plus your contribution and the return from the previous year also earn a return. In year 3, you invest more money and it earns a return, plus your contributions and earnings from previous years earn a return. Before you know it the increases to your account balance each year are coming more so from the growth your previous contributions than on your current contributions; after decades, most of your account balance will be due to growth rather than your direct contributions.

The power of compound interest is modeled by this equation, which represents exponential growth:

compound interest equation

Using the equation for compound growth, you can get an idea of how much money can grow with a given rate of return and time period. In real investing in the stock market, you will not receive the exact same rate of return each year like clockwork; in some years you will lose money, in others you will see a very high return, and everything in between. But on balance, over long periods of time, the math of compound interest reveals the scale of growth possible with even an irregular return like you would see from the stock market. (Investments that give a regular and guaranteed rate of return, such as bonds and certificates of deposit, are comparatively low-returning and not usually considered appropriate long-term investments for a young person.)

For example, if you invested $250 per month at an 8% average annual rate of return for five years during graduate school, in that time you would contribute $15,000 and your ending balance would be $18,369.21. The growth over that time period is nice but not staggering.

But if you then leave that money alone to continue compounding at 8% per year for 50 years – make no additional contributions – your money grows to a mind-boggling $989,688.35!

That’s an extra one million dollars in retirement that you would not have had if you had not started investing during graduate school!

The numbers above are for illustrative purposes only. It’s still incredibly worthwhile to begin investing during graduate school even at a rate of less than $250/month. Compound interest works the same on any sum of money, whether $5 or $5,000. The point is that investing with time on your side turns small amounts of money into large amounts.

Further reading:

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The Difference between Traditional and Roth IRAs

When you open an IRA, you have the choice between opening a traditional IRA and a Roth IRA. (You can contribute to either/both in the course of a year, but the maximum contribution limit applies to them both together, not each separately.) There are a number of differences between the two types of IRAs, especially when it comes to eligibility and withdrawing money in retirement, but there are two key differences that are most salient for young people who are eligible for both types: when you pay income tax and how to withdraw money without penalty prior to age 59.5.

Further reading:

When You Pay Income Tax

With both types of IRAs, you won’t pay any tax while the money is growing inside the IRA.

With a traditional IRA – unsurprisingly, the first type introduced into the tax code – there is an additional tax incentive upon contribution to the IRA, which is that you exclude the amount you contribute from your taxable income for the year (take a tax deduction). You take a tax deduction on the money you contribute, then your money grows tax-free, and then you pay ordinary income tax on the amounts you withdraw each year in retirement. The traditional IRA is a mechanism of tax deferral.

The Roth IRA is the newer type of IRA (named after the senator who introduced it). The tax break on the Roth IRA is the flip of the one for the traditional IRA. You pay the full income tax due on the contribution you make to the Roth IRA, then your money grows tax-free, and you withdraw it tax-free in retirement.

The key to choosing between a traditional and Roth IRA is to guess when you will pay a lower tax rate: upon contribution or withdrawal.

One way to approach this question is by considering when you will be in a lower marginal tax bracket: now or in retirement? The rationale behind this is that you are going to get the tax break on the last dollars of your income, which are likely to fall in your marginal tax bracket. You know your marginal tax bracket today; most graduate students without outside sources of income fall in the 12% marginal tax bracket or even lower (plus your marginal state tax rate). But you have to guess whether the marginal tax bracket you will fall into in retirement will be higher or lower. In the intervening decades, you will experience personal changes in your income and tax bracket, and there are likely to be legislative changes to the tax code and rates.

This guess is probably easier for graduate students than for the average American. Graduate students can make the reasonable assumption that their current income is much lower than their income will be throughout their careers and likely also in retirement. (Ask yourself: Do you want to be living the same lifestyle in retirement that you are in graduate school or would you like it to be more lavish?) Whatever might happen to the tax code more broadly, confidence that you are in a personal low-income and low-tax bracket period is a strong argument for the Roth IRA over the traditional IRA. I and virtually every graduate student I’ve spoken with about this issue chose the Roth IRA over the traditional IRA during grad school.

However, there are more nuanced arguments that you might consider that are more in favor of the traditional IRA, even for someone in a low tax bracket currently. Such arguments are beyond the scope of this article, but there is plenty of reading material available on the decision between the traditional and Roth IRA for you to dive into if you are interested.

Further reading: Traditional vs. Roth IRA: The Unconventional Wisdom

Penalty-Free Early Withdrawal

One of the big planning/psychological barriers to beginning to save for retirement is the nagging question “What if I turn out to need the money in the near future?” After all, life is unpredictable; sustained loss of income or a very expensive emergency might be just around the corner. Some people find it difficult to put barriers between themselves and their money no matter what degree of cash they may have accessible in an emergency fund or other savings. The prospect of sequestering money that can only be used many decades from now in retirement can be daunting.

The Roth IRA (as opposed to the traditional IRA) helps to alleviate this anxiety. While it is rarely a good idea to take already-contributed money out of an IRA (after all, you are unplugging that money from the power of compound interest), you do have that option with the Roth IRA. Because you have already paid your income tax on your Roth IRA contributions, you can withdraw those contributions at any time without penalty (or additional tax). Certain conditions must be met to withdraw earnings early without penalty or tax. For one example of a qualified distribution, the IRA must be at least five years old and the withdrawal is used to buy a first home (up to $10,000); there are other conditions that create qualified distributions as well.

With a traditional IRA, on the other hand, early withdrawals always result in tax due, and penalties are also assessed if the withdrawal is not qualified.

The Type of Income You Need to Contribute to an IRA

Only “taxable compensation” (formerly “earned income”) can be contributed to an IRA; while IRAs are independent of your workplace, they are not independent of work. For most Americans, this is a non-issue, because they work for their income. For example, they might be employees receiving W-2 income or self-employed; both of these types of income are taxable compensation.

Up through 2019, taxable fellowship income not reported on a W-2 was not considered taxable compensation. Starting in 2020, taxable fellowship income not reported on a W-2 is considered taxable compensation. That means that a graduate student receiving a stipend is eligible to contribute their stipend income to an IRA, whether that stipend is reported on a W-2 or some other form (or not at all)—as long as it is taxable in the US.

If none of your income is taxable in the US because you are a nonresident and benefit from a tax treaty, you don’t have “taxable compensation” and are not eligible to contribute to an IRA.

Further reading:

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How Much to Contribute to an IRA during Graduate School

The right amount of money to contribute to an IRA in a given year of graduate school might be $6,500, $0, or somewhere in between.

Graduate school is an extraordinary time of investment in one’s career, possibly to the exclusion of investing for retirement. While many graduate students are paid stipends that more than cover their living expenses, some graduate students are either not being paid a living wage or have unusually high expenses (e.g., have dependents).

To determine the right amount for you to contribute to an IRA, you must explore your means and your goals.

Means: How does your stipend compare to the local living wage? While the local living wage will not exactly match your expenses in every category, it should give you a sense of the baseline cost of living in your county or metro area. If your stipend is at or above the living wage and you aren’t able to save anything, try to reduce your expenses so you can start to invest or accomplish other financial goals. If your stipend is below the living wage, you may not have the means to start saving or investing right now; getting through graduate school without accumulating debt may be an appropriate financial goal.

Goals: Not all graduate students with discretionary income should jump right into investing. There may be higher-priority financial goals such as paying off high-interest debt or saving cash for emergencies or short-term expenses. But if investing for retirement becomes your top financial goal or a goal you work on concurrently with other goals, it is appropriate to contribute to an IRA.

If a graduate student does have the means to invest and investing is their top financial goal, rules of thumb come back into play. The most common (mainstream) retirement savings rates bandied about in the personal finance community are between 10 and 20% of income (gross or net). I think investing 10% of gross income into a Roth IRA is a great initial goal for a graduate student; it was my retirement savings rate when I started graduate school. It may be one easily reached (especially if you build it into your budget from the beginning) or quite challenging. If it takes you years of budget optimization to reach 10% (or you never do), that’s fine. If you want to go higher than 10%, that’s great too, and you’ll have a wonderful nest egg when you transition out of graduate school. (My husband and I reached a 17.5% savings rate from our gross income by the time we defended, but it took years to raise our savings rate to that point.)

A higher retirement savings rate will help you reach financial independence faster, but you always have to balance that against your quality of life in the present. But if you have the means and aren’t working on a more pressing goal, I do recommend regularly contributing to a Roth IRA during graduate school, even if it’s a small percentage. Getting into the habit of saving for retirement is as valuable as the savings itself; if you save during graduate school, once you have a Real Job you’ll never be able to tell yourself that you “can’t afford to save right now.”

Further reading:

How to Open an IRA

The actual process of opening an IRA is straightforward, but choosing where to open it and what to invest in inside the IRA will take some research and decisions on your part.

Briefly, using index funds (a passive investing strategy) is the most effective, least expensive, and most time-efficient manner of investing. You can buy index funds (e.g., the S&P 500 index fund) or a fund of index funds such as a target date or lifecycle fund at any number of brokerage firms. (Brokerage firms that specialize in trading single stocks, i.e., the ones you probably see the most advertisements for, may not offer index funds.)

When you select a brokerage firm, you need to ensure that: 1) it allows you to open an IRA, 2) it offers the investments you are looking for, 3) it is not too expensive to own the funds, and 4) you can meet the account minimums. Index funds are inherently inexpensive, but there will still be some price differences among brokerage firms. Different firms also set different account size minimums, such as between $1,000 and $3,000, but some waive these minimums if you set up an automatic savings rate into the account.

Further reading: Brokerage and IRA Account Minimums

Once you have selected your brokerage firm and investment, you are ready to open your IRA. You should be able to complete the process online in just a few minutes, and the brokerage firm’s website will guide you through the process. You will be asked for your personal information such as your name, SSN, and address. Once you have the IRA open, transfer in the amount of money you need to open the account and/or set up an automatic savings rate, and choose the investment(s) you want to buy with your money.

Give Yourself a Raise: Re-Evaluate Your Fixed Expenses

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Increasing your income as a graduate student can be quite challenging, to put it mildly. Stipends sometimes increase with cost-of-living raises or the student’s advancement to candidacy. Fellowships that pay high stipends are quite competitive. You could take out (additional) student loans to give yourself more spending money, but you’ll pay back all that debt (plus interest) later. Establishing a side income or side gig is not an option for all grad students, and those that do are likely making a significant time investment.

A version of this post originally appeared on GradHacker.

give yourself a raise re-evaluate your fixed expenses

Because their options for earning more money are so constrained, grad students seeking to free up extra cash most often turn to decreasing their living expenses. You can effectively “give yourself a raise” by adopting positive financial habits or practicing frugality. This first post in my “Give Yourself a Raise” series focuses on doing so by evaluating your fixed expenses.

I always encourage people looking to reduce their expenses to consider their fixed expenses first. Your fixed expenses are those that are the same every time they occur, such as your rent/mortgage, minimum debt payments, and certain utilities. You only need to make and carry out a one-time decision to reduce a fixed expense, which will free up additional cash flow for you on a regular basis for months or years to come. While this one-time decision might be difficult to make or implement, in my opinion this is often preferable to trying to reduce expenses by methods that require willpower or time on an ongoing basis.

While any of your fixed expenses could potentially go on the chopping block, those that are largest and/or discretionary are usually the ripest for reduction.

Rent/Mortgage

Housing is usually the biggest monthly expenditure grad students have and therefore should be the first to be examined. We all know how to (potentially) reduce our housing expenses: move to a smaller, further, or otherwise less desirable residence; add one or more roommates; or find a better deal. More creative alternative housing arrangements may also be possible, e.g., house-sitting or serving as a resident advisor.

In this area, graduate students usually don’t have a lack of knowledge of how to reduce their housing expenses but rather may not re-examine their decisions as their priorities, finances, and options evolve or are unwilling to move even when it is warranted. My husband and I went several years during grad school without re-evaluating our housing choice until a rent increase compelled us to. Searching for housing and moving certainly wasn’t easy, but by giving up a few amenities and switching from an apartment in a complex to a privately owned townhouse we significantly reduced our rent. The result was an extra $100+ each month that we could put toward other spending that we valued more.

Cable/Internet/Subscription Services

They key question to ask yourself with respect to your fixed utilities and subscription services is “Am I getting the best deal available for what I actually need/want?” It’s easy to lose sight of how well what you’re paying for matches what you truly use, especially as offers and packages change so quickly.

In the last couple years many streaming options have become available for content that used to be the exclusive domain of cable TV. If you’re paying for cable, now is the time to determine if the channels you actually watch are available in a lower-cost form. Don’t forget that you can still watch network TV for free if you have an antenna.

After you’ve determined what you actually want to pay for, simply being a savvy consumer and shopping around for the best price may keep you from spending tens or hundreds of dollars over the course of a year. If you switch providers to get a promotional deal, though, be sure to factor in any activation-type charges that you may incur and the length of the contract you must sign.

Cell Phone Service

People frequently espouse fierce brand loyalties when it comes to their smartphone brands and cell plan providers, which can get in the way of finding the service that fits their needs for the best price. If you’ve never looked at providers other than AT&T and Verizon, you may be able to realize significant savings immediately or when your current contract ends. My husband recently halved his cell phone bill by switching from Verizon to Cricket Wireless, and I count my patronage of Republic Wireless as one of the best financial decisions I made during grad school. Project Fi, Ting, and other mobile virtual network operators are well worth considering, and the service and price are continually improving. Switching providers while keeping your current phone or paying up front for a new phone can give you a lot more options for lowering your fixed expenses than buying a phone through a contract (if you can manage the irregular expense of buying a full-priced phone every so often).

Insurance

Reducing insurance premiums can be tricky because forgoing insurance or paying the least amount possible is often not the best decision (e.g., dropping collision coverage on a car you can’t afford to replace), yet you don’t want to be over-insured (e.g., paying for life insurance when you have no dependents or co-owned debt).

Regularly shopping around for the best price for the types and amounts of insurance you actually need is a great habit to build. You need to do your own research on what coverage you need and not rely on a salesperson to tell you (e.g., begin your reading on auto insurance, renters insurance, and life insurance with independent sources). If you have a good emergency fund, increasing the deductibles on your policies may lower your fixed expenses without jeopardizing your finances. Buying your various policies through the same company may also lower your overall premiums.

While you can ‘give yourself a raise’ by reducing any fixed expense by any amount, in this post I have highlighted the most common fixed expenses with reasonable flexibility to effect significant savings over the course of a year. Your own budget may include other types of fixed expenses that are worth evaluating. When you desire additional cash flow and income increases are hard to come by, it is prudent to focus on reducing your living expenses as best you can. Ultimately, you are the best person to judge whether you are using your money (and time) optimally while you are in grad school.

What fixed expenses have you reduced during grad school and how did you do it? When searching for ways to free up cash flow, do you prefer to focus on your fixed or variable expenses?

Does Your University Use Section 117(d)? Please Take Our Survey!

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There have been more developments with the GOP tax plan (the Tax Cuts and Jobs Act) with respect to graduate students’ tuition benefits.

Last week, I gave my interpretation of how the House bill selectively eliminates one form of tuition benefit (tuition reductions) while leaving in place another (tuition scholarships).

Since my writing, an amendment was proposed to maintain the tuition benefits as they currently are, but it was defeated. The House bill is expected to be voted on tomorrow (Thursday, November 16, 2017).

You can find more information and action steps on the NAGPS website.

The Senate version of the tax bill has also been released in the last week, and it apparently does not include the same changes to graduate student tuition benefits that was in the House bill.

If both bills pass as currently written, they will go to a conference committee to create a compromise between the two versions. Then, the agreed-upon version will go back to the House and Senate to be voted upon. It is still important to voice your opinion about this particular provision of the bill to both your representatives and senators so that either the conference committee does not include changes to the tuition benefit in the final version of the bill or your Congresspeople vote against the bill if it does.

tuition tax survey

In the meantime, I am collaborating with two current graduate students, Andrew McCubbin and David Dixon, to figure out which universities are using section 117(a-b) vs. 117(d) for their tuition benefits. My purpose is not to discourage anyone from taking action opposing the TCJA but rather to help students with their personal financial planning and advocacy at the state, university, and department level, should the TCJA pass with the tuition benefit cut in place.

We have a survey up right now; would you please fill it out to the best of your ability and share it with your peers? In the next few days, we’ll start sharing our determinations from the survey on this results page. Also, feel free to comment on this post or email me if you have relevant information but don’t want to fill out the survey!

Which Graduate Students Will Lose Tuition Benefits Under the Proposed House Tax Bill?

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Update: Please fill out this survey on how your university handles your tuition benefit. I and some colleagues are trying to determine which universities use the method slated for elimination in the House bill.

The House GOP released their proposed tax bill (The Tax Cuts and Jobs Act) last week. Over the last several days numerous media outlets have covered the effect the bill would have on graduate students who receive “tuition waivers,” and graduate students have started organizing responses. Students at Carnegie Mellon, for example, calculated how much more tax students in various schools would have to pay if they lost their tuition tax benefits.

Here are articles I read that are most focused on the bill’s effect on graduate students:

lego tuition waiver tax
An excellent illustration of the possible impact of the Tax Cuts and Jobs Act on some graduate students from Lego Grad Student.

When I first started reading about this issue, I got the impression that under the bill all graduate students would see a large increase in their tax burden based on the reversal of their previously untaxed tuition benefits. The strongly worded headlines above certainly imply that graduate students would see such an increase in tax that continuing their educations would be impossible.

However, after spending many hours reading the current tax code, Publication 970, the proposed bill, university websites, news articles, and social media, I think that there is some confused information and hyperbole in the early reports, or at least what the articles are saying is being taken out of context by scared graduate students. However, I haven’t fully figured out what the implications of the new bill are, and I have several questions that are still outstanding. This post details my current thoughts on the issue. My intention is to calm some of the extreme fear I’m observing (in those who do not need to be so fearful), while still imploring you to voice your opposition to the proposed changes to tuition benefits and other effects on higher education funding.

To be clear, I don’t wish to see the net (after-tax) income of any graduate students drop as a result of tax reform. I believe all graduate students who have assistantships or who receive fellowships should be paid at bare minimum a living wage. Honestly, that’s a pretty low bar that not all universities currently meet. If a new tax bill is passed that increases the tax burden on graduate students, the universities should take steps to ensure that current graduate students’ net pay does not decrease. Otherwise, they do risk losing students they have already invested in or putting the students who remain in such a precarious financial position that they are distracted from their research.

But before you panic about your own personal finances, I think you should look carefully at how exactly you are paid. Not all graduate students will be negatively affected by this direct changes made by this bill (should it pass); I think the effects are going to be less widespread and less extreme than what the current coverage and conversations imply.

However, I do think you should lobby your representatives to maintain (more of) the current education benefits. (You just may not be able to use yourself as an example.) This is a moment in which graduate students and academics can band together to advocate for ourselves and academic research in general, whether or not we will be affected in our individual finances. The end of this post lists a few action steps. If the bill does pass, there will be more advocacy to be accomplished within your state and at your university to mitigate the bill’s effect on your and your classmates’ bottom lines.

grad student tuition tax bill

A disclaimer: I’m using a lot of secondary source information for this post. I did read sections of the current tax code and the proposed bill, but as I’m not a policy wonk or lawyer I freely admit that they are difficult for me to parse. If you find any mistakes, wrong conclusions, or omissions, please let me know so I can update the post. Accuracy is very important to me.

What Tuition Benefits Do Graduate Students Currently Receive?

We have to get technical for a bit here because the devil is in the details. I’ve seen students and articles using the terms “tuition waiver” and “tuition remission,” which do not appear in the proposed bill, Publication 970, or (as far as I’ve read) in the current tax code. So I’m going to avoid drawing conclusions from the common terms that are used in academia in favor of figuring out what is actually in the current tax code and bill.

There are three broad tuition benefits that I’ve known graduate students to use:

  • tax-free scholarships, fellowships, and tuition reductions (the most common)
  • the Lifetime Learning Credit
  • the Tuition and Fees Deduction

Basically, if you have any qualified education expenses such as tuition and required fees (the precise definition is not consistent), you can get some kind of tax break.

The proposed tax bill eliminates the Lifetime Learning Credit and the Tuition and Fees Deduction in favor of an expanded American Opportunities Credit (which can only be used in the first five calendar years of post-secondary education and therefore pretty much doesn’t apply to graduate students). This change will increase the tax burden on the students who previously used the Lifetime Learning Credit or Tuition and Fees Deduction, but that hasn’t been the main concern I’ve seen expressed by graduate students in the media.

The big kahuna here are the tax-free scholarships, fellowships, and tuition reductions. There are no monetary limits on these benefits like there are on the Lifetime Learning Credit and Tuition and Fees Deduction. Currently, any scholarship or fellowship that goes toward paying your tuition or qualified fees is not taxed. Also not taxed is any “tuition reduction” you receive. A tuition reduction is the difference between the sticker price tuition and the tuition you are charged.

Scholarships, fellowships, and tuition reductions are all lumped together in Chapter 1 of Publication 970 and Section 117 of the tax code, so I’ve never paid much mind to which is which exactly since they were all tax-free. But the proposed tax bill specifically targets one benefit and not the other.

Which Tuition Benefits May Be Lost and Which May Be Maintained?

The benefits are delineated in Section 117 of the tax code as qualified scholarships (117(a-b)) vs. qualified tuition reductions (117(d)). The tax bill proposes “striking subsection (d) of section 117” (p. 96), presumably leaving intact the other sections.

117(a-b): Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii). The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

117(d): Gross income shall not include any qualified tuition reduction. For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization… In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, [the above] paragraph shall be applied as if it did not contain the phrase “(below the graduate level)”.

How Can You Tell What Type of Tuition Benefit You Receive?

Section 117(d) explicitly applies only to university employees, which in the case of graduate students means teaching or research assistants. So if you are currently not a student-employee, i.e., you do not receive a W-2 at tax time, your tuition benefit should not change (which further argues for the superiority of fellowship funding over assistantship funding). (An analysis from a Berkeley student concurs this point.) However, I think it’s pretty unusual for a PhD student to complete her degree supported only by fellowships and training grants; most students serve as TAs or RAs for at least a few (if not all) of their semesters.

For student-employees, the question becomes: How do you know if your tuition and fees are paid by a qualified scholarship or a qualified tuition reduction? I do not have a good answer, and I’m hoping a reader can provide one. I don’t know that there is a different reporting mechanism, for example, for qualified scholarships vs. tuition reductions. (The 1098-T, if one is issued, should reflect the required tuition and fees charged to the students and the scholarships applied, but I don’t know if or how a tuition reduction would be reflected in that document. A qualified tuition reduction would not appear on a W-2.)

The best suggestions I can make at this point to figure this out for your situation are:

  • Re-read your offer letter and any employment contract you have with your university for the keywords “tuition reduction” vs. “scholarship,”
  • Check your Bursar/Cashier’s/Financial Aid account for the term “reduction,” and
  • Ask administrators at your university whether you receive a tuition reduction (e.g., the Bursar/Cashier’s office), pressing them to consult the university attorneys if they can’t point you to an answer.

How Common Is the Use of Section 117(d) for Graduate Students on Stipends?

One of the popular articles circulating by Vox pulled a figure from an infographic sheet the College and University Professional Association for Human Resources. (CUPA-HA also created this summary bulletin on Section 117, which makes it clear that section 117(d) is used by many types of university employees beyond TAs and RAs). In turn, the infographic is based on the 2011-12 National Postsecondary Student Aid Study.

vox 117d impact
An infographic from Vox on the number of students taking advantage of the tuition tax benefit in section 117(d).

The relevant number that the Vox article and CUPA-HA cite is that 145,000 graduate students benefit from section 117(d). (I was very curious about how they determined this number as it seems so wonky and specific to help with the unanswered question above, but the version of the 2011-12 National Postsecondary Student Aid Study that I could access did not contain this data. So I would like to dive further into those numbers, but I’m stuck for now.)

Taking the 145,000 students at face value (50% of whom earn more than $50,000/year, so not exactly traditional graduate students who would be unable to continue their studies due to an increased tax bill), what fraction of the total graduate student population is that?

I couldn’t find the answer directly, but the recent NSF survey of earned doctorates cites 54,070 doctorates awarded in 2014. Approximately 50% of PhD students never complete their degrees, so I would peg the current number of doctoral students in the US between 250,000 and 500,000. The 145,000 figure probably also includes master’s students, making the relevant pool of graduate students in the US even larger.

145,000 students using section 117(d) is certainly a large fraction of that total, but definitely not everybody as was my first impression. (Keep in mind, though, that an individual student may use section 117(d) during part of her time in graduate school, so the number using it at any given time is less than the total number who use it at any point.)

As far as how the proposed legislation will affect students at individual universities goes, I have two data points so far (please let me know if you’ve received a definitive answer from your university!):

The Dean of the Graduate School at Cornell released a statement regarding their policies. It reads in part:

 

Cornell University does not rely on 117(d) for favorable tuition-related tax treatment of funded graduate students, who are considered students, not employees, at Cornell.

Because Cornell pays graduate students reasonable compensation for teaching, research, or other services they provide to the university, Cornell graduate students receiving a tuition scholarship are receiving a qualified scholarship as described under sections 117(a), 117(b), and 117(c) of the current tax code, provisions which are not proposed for repeal in H.R. 1.  Thus, the proposed repeal of section 117(d), if passed into law, will not have an impact on how Cornell graduate students’ tuition scholarships are handled.

While the stipend for graduate students may be taxable under the current tax code, the tuition scholarship is not, and would not be affected by repeal of 117(d).  As H.R. 1 is written, Cornell graduate tuition scholarships will continue to be treated as qualifying (tax free) scholarships under 117 (a), thus, there would be no change from current tax law that treats these tuition scholarships for students as tax free.

I graduated from Duke University three years ago, and my understanding was that my tuition and fees were paid by scholarship. In my Bursar account, for example, I would see a tuition charge posted and then a payment posted on my behalf. I assume that payment was a scholarship, and I don’t know how a tuition reduction would have appeared. My recollection was (I think) confirmed by this page that discusses how graduate students are supported: “Full or partial scholarships: Cover tuition and fee expenses.” Tuition reductions are not mentioned. So I think that Duke students, like Cornell students, also do not depend on section 117(d) for their tuition tax benefit.

A Tentative Guess as to the Impact of the Proposed Bill

Here is my intuition on the matter, and I’m curious if it bears out or not. I formed it based on the scantest impressions and it involves far too much extrapolation.

I think perhaps tuition reductions are used mostly by public institutions, whereas qualified scholarships more so by private institutions. Therefore, eliminating the non-taxable status of tuition reductions may disproportionately affect public school students.

However, the large numbers I’ve seen in the media of the “devastating” effect of the tax bill on graduate students are based on tuition charged at private universities and by public universities for out-of-state students. (State policies regarding residency status for the purpose of in-state tuition vary. In some states, students are eligible for in-state residency after the first year. In others, such as Georgia, out-of-state students maintain their status for the duration of their degree.) Public, in-state students might see their taxes increase by hundreds of dollars or a thousand dollars, not the multiple thousands or $10,000+ I’ve seen quoted (except perhaps in the year when they are considered out-of-state students), which is if the full tuition and fees at some private universities were taxed at 12 or (partially) 25%.

I think that if tuition reductions are being used by private universities, they will have more wiggle room to pivot to either compensate their students differently or to pay them more. Well-funded departments and universities may also be able to increase their students’ pay to make up for the additional tax due (perhaps a one-time grant in the first year for out-of-state public university students). Therefore, I hope that the negative effects of the bill will be smaller and more limited in scope than currently anticipated.

Steps You Can Take to Advocate for Higher Education

All that notwithstanding, this is the time for advocacy. I fear that if the proposed tax bill passes as written, the additional tax burden will fall largely upon the students who are least financially secure, namely students in underfunded departments at public universities (earning, for example, less than $20,000/year). A $1,000 increase in their tax bill could easily push them into (further) credit card or student loan debt because their finances are so precarious to begin with. Even if your university does not rely on section 117(d) or you have a fellowship, please stand up for your fellow PhD students who are at risk.

  1. The NAGPS Call Congress Day is TODAY, November 8. You can find all the details about action steps on their Facebook event and website. You can still use their talking points as guidance after November 8.
  2. If you are represented by a union, participate in their lobbying efforts, or consult them on how to organize your own.
  3. Talk with your peers about advocacy steps you can take as a group at the national level and, if this provision of the bill passes, at the state, university, and department levels.
  4. Tell your family members, neighbors, college friends, mentors, etc. about this issue and ask them to advocate for PhD students as well.

In all of this, if you are currently taking advantage of a tuition reduction I encourage you to use your personal numbers (by what absolute amount and percentage your tax bill would increase) like this student did. These numbers are shocking and powerful.

Do you benefit from a tuition reduction or is your tuition paid by scholarship (or both)? Do you expect your tax burden to increase or decrease if the Tax Cuts and Jobs Act passes as written and by how much? How are you advocating for section 117(d) to remain in the tax code?

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?