Personal Finance for PhDs

Live a financially balanced life - no Real Job required

Blog

Options for Paying Down Debt During Grad School

by

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 It Matters How You Are Paid

by

If you look across a sample of graduate students receiving stipends within any given field, you will find that they have quite similar day-to-day activities: taking or teaching classes, researching, writing articles or chapters, applying for funding, etc. However, behind the stipends that allow these students to engage in their studies are two very different types of sources, which the student’s tax forms reveal. (This distinction and the tax-related details herein are for graduate students in the US.) Whether a student has one type of funding or another has implications for his taxes, access to retirement accounts, and possibly university benefits.

A version of this article first appeared on GradHacker.

The two types of pay that provide stipends to graduate students are ‘compensatory’ and ‘non-compensatory.’ Compensatory pay is given in exchange for work. Typically, this work is in the form of an assistantship – research, teaching, or graduate. Non-compensatory pay is given as an award, and there is (according to the IRS) no work requirement for receiving it. Typically, this award is in the form of a fellowship or participating in a training grant. (Scholarships that go toward paying tuition, fees, and/or health insurance premiums are another form of non-compensatory pay.)

why it matter how you are paid

The type of pay that is behind a graduate student’s stipend potentially affects several aspects of her finances, depending on the university’s policies.

1) The tax forms generated by each type of pay differ. Students with compensatory pay will receive a W-2 in January. Students with non-compensatory pay will see their pay listed on, depending on the university’s policies, a 1099-MISC in box 3, a 1098-T in box 5 (probably summed with the scholarships received), or an unofficial courtesy letter. It is also possible that students with non-compensatory pay will receive no additional notification at tax time. Despite these different reporting mechanisms, a graduate student will report both types of pay in line 7 of his 1040 (with “SCH” denoted next to the line to indicate non-compensatory pay).

2) Graduate students receiving compensatory pay will have the opportunity to have income tax withheld from their stipends, while graduate students receiving non-compensatory pay may or may not, depending on the university’s policy. If students receiving non-compensatory pay do not have the option to have income tax withheld, they may have the responsibility of paying quarterly estimated tax.

3) With rare exceptions, graduate students cannot elect to contribute to retirement accounts at their universities. Therefore, graduate students who wish to save for retirement inside a tax-advantaged account typically opt to contribute to an Individual Retirement Arrangement (IRA). However, only compensatory pay (aka ‘taxable compensation’ or ‘earned income’) is eligible to be contributed to an IRA. Graduate students who receive only non-compensatory pay in the course of a calendar year (and are not married to a person with compensatory pay) are not eligible to contribute to an IRA in that year (though they can still save for retirement).

Free Email Course: Investing for Early-Career PhDs

Sign up for the mailing list to receive the free 10,000-word email course designed for graduate students, postdocs, and PhDs in their first Real Jobs.

We won't send you spam. Unsubscribe at any time. Powered by Kit

4) Full-time graduate students typically do not pay FICA tax on their stipends, but the reason for this is different between the two types of pay. Graduate students with compensatory pay enjoy a student exemption to FICA tax, whereas non-compensatory pay is not subject to FICA tax in the first place. This distinction is important if graduate students ever become predominantly viewed as employees rather than students, which sometimes occurs in the summer when they are not enrolled in classes. In that situation, they might lose their FICA exemptions temporarily and have to pay additional tax.

5) The benefits that universities extend to students may differ based on their status. Graduate students receiving non-compensatory pay are unambiguously students in the eyes of the university. Graduate students receiving compensatory pay are both students and employees, and universities have varying views on which half of that balance is dominant. In some cases, when graduate students are considered employees, different or additional benefits may be extended to them that graduate students who are only students do not receive, such as union membership, childcare subsidies, and pensions.

While graduate students receiving compensatory and non-compensatory pay likely have very similar roles within the university, you can see that the IRS and the universities draw a number of distinctions between the groups that become important at some points in a graduate student’s career. If you are unsure which type of pay you are currently receiving or received earlier in the calendar year, you can either wait to see which kind of tax form you receive (W-2 for compensatory, anything else or none for non-compensatory) or inquire within your university’s payroll or financial aid office.

Have you received compensatory, non-compensatory, or both types of pay during graduate school? Was there a time that you realized that your type of pay affected your life materially? Do compensatory and non-compensatory students receive any different benefits at your university?

A Dozen Frugal Tips for Graduate Students

by

Today’s post is by Brett Green, a physics PhD student at Penn State. These frugal tips are part of the month of frugal tips going up daily on the Personal Finance for PhDs Facebook page. If you want to receive the tips for the entire month plus bonus tips by other PhD contributors like Brett, sign up here.

Frugality is the complement of earning money – earning increases income and frugality decreases expenditure. Just like how earning money can be anywhere from a necessary bore to pay the bills to a way to make a living by doing what you love, frugality doesn’t have to mean undercutting yourself and in fact can lead you to just the opposite! Sometimes it’s almost like a game to me to find new ways to be resourceful and save money, I love learning new things along the way, and habits that save money also mean reduced waste and saved energy. I hope to share some of these benefits with you and hope they prove to be helpful.

On that note, though the main focus here is on saving money, I’m sure that we all are interested in saving time as well as money. When some time-saving ideas tied naturally into these money-saving ideas, I included them too. Besides, you know what they say – “time is money”!

frugal tips for graduate students

Join the Mailing List to Download Frugal Tips for PhDs-in-Training

The download includes 30+ frugal tips for PhDs-in-Training with links to video and additional written content.

You'll receive 1-2 emails per week to help you make the most of your money during your PhD training.

We won't send you spam. Unsubscribe at any time. Powered by Kit

Buy secondhand and at alternative retailers

Buying secondhand and other places “off the beaten path” can have even more benefits than saving you money! You never know what you’ll find at thrift stores – the like-new camera I bought for $10 would have cost me $160 retail, and I’m much happier with my historic Yugoslavian dining room chairs than I’d be with something from the big box stores. The things you’d find in a thrift store are almost invariably not only less pricey but also more unique and interesting! Check out closeout stores too if you have any around, where even new goods can be found at up to half off their normal prices.

Create Your Own Entertainment

Make your own fun instead of paying for it and you’ll save on entertainment! There are myriad ways to amuse yourself without needing to pay for tickets, cable television, or the like. Going to a park, going out with friends, are solid options, as are hobbies. If you don’t have hobbies, this would be a great reason to take one up. As a bonus, if you take up an art or craft, you can sell your work on top of your entertainment savings!

Research Your Purchases Ahead of Time

Give yourself time to have options by starting your search for something you’ll need before you direly need it. Most of the best deals are found by watching and waiting while patiently keeping a lookout. This is especially helpful if you like thrift stores, as their inventories are constantly changing. Similarly, I like to set up Craigslist searches with e-mail alerts so I can jump on good deals right away. Remember, though, that you need to be looking actively to find your query – watching and waiting alone won’t do the job! Try to think of new places to look or people to ask.

Sell before the Move-Out Rush

Plan ahead for a move-out by starting to sell things before the last minute. Your offerings will be the first others will see and you won’t be forced to accept a low offer because of a time crunch. If you aren’t able to sell something, I encourage you to donate it. Even putting aside the societal benefits of charity and waste reduction, this benefits you directly as a tax deduction.

Buy During the Move-out Rush

Conversely, going move-out hunting when students vacate dorms (usually May) and leases are ending (usually August) is a great way to pick up left-behind freebies often in new or like-new condition! Many students fail to plan ahead and end up abandoning things that are perfectly good. One May I picked up two brand-new 500GB hard drives still boxed and sealed in antistatic bags from beside a dumpster, for example, and about a month ago a friend of mine picked up and made $40 off a leather office chair.

Buy and Cook in Bulk

Buy in bulk, and then cook in bulk, use your freezer! The first saves money, the second saves time, and the third saves your food from spoilage when you go in bulk. Some grocery stores display the price per unit (e.g. per pound) beside the package price, making it easy to see that you can save as much as half by buying in bulk. If not, bring a calculator – it takes only seconds to do it yourself! Cooking in bulk means you’ll only have to preheat, clean, etc. once, which is not only a timesaver but can make it less of a chore for those of us who don’t really like to cook. Finally, the wonderful preservation technology of the freezer means you won’t have to throw it out! For example, I buy about six pounds of chicken breasts for less than $2/lb, about half the regular price, and cook and freeze them all so I can just defrost them and have them ready in less than a minute for the next several weeks.

Bring Your Lunch

Pack your own lunch to campus to save both money and time instead of making a detour midday to find a restaurant. On top of that, you get to design your lunch exactly the way you want it, not constrained by any menu!

Grow Your Own

Start your own garden and grow some of your own groceries and spices! It’s awesome to see what you can grow, and you can bet they’ll taste better just because you know that you grew them yourself. You may not even need to go to a garden store – many such as onions, lettuce, and potatoes can be grown from your leftovers. I was a proud potato papa when I found that the two I had buried had grown into twelve! You can also grow many plants from cuttings by taking a few inches off a stem and putting it in water until it roots. I’ve grown mint, basil, rosemary and lemongrass this way.

Bicycle

Buy a quality bike instead of a parking pass! Getting out and riding in the fresh air is good for you too. Learn to take good care of your bike and it’ll serve you well for many years to come, and you’ll be able to help out and impress your friends with your knowledge of bicycles. You’ll be environmentally friendly this way too.

Buy a Home

Buying a house or condominium, if you can, means you’ll be building equity instead of just paying rent. If you have spare rooms you can rent them out as well! Just to be safe, if you plan to sell it after you graduate, it would be wise to talk to those familiar with the housing market to get a picture of how the home’s value might change. I figure, at least, that if you’re looking for a house now, then by the time you’re ready to move another student will be there in your former role as the buyer.

Put in Sweat Equity

Do your own “dirty work” when applicable instead of hiring someone, and you’ll get a sense of satisfaction and pride in addition to saving money! This can be as simple as washing your car by hand, or it could be more complicated, such as home maintenance. Even many things that are at first intimidating, though, actually aren’t so hard once you start. I’ve fixed my water heater for $12 and my gas fireplace for free with just some courage and the manuals, and the sensation of accomplishment and victory afterward is awesome! On the not-so-intimidating (for a young man, at least) side, I’m about to 3D-print a larger hair clipper attachment to match the length I like.

Maintain Properly

Take care of things and they’ll last longer and work better, saving you (you guessed it!) time and money, not to mention possible frustration, in the long run! Whenever you get something new, it’s good practice to check what you need to do to keep it in great shape. Most things will have instructions or a manual available, and even for secondhand goods which no longer have the original copies you can bank on the information being online. When I get a new tool, even if I only skim the features and capabilities, the two places I’ll be sure to read through are safety and maintenance.

Note how many of these come from planning; certainly the 3rd (searching ahead), 4th (selling ahead) and 5th (move-out hunting) and less explicitly also the 6th (cooking ahead), 7th (packing lunch), 10th (buying a home) and 12th (taking care of things) can be thought of in terms of planning ahead. This wasn’t even intentional on my part – it’s just a fact of the way things work that planning ahead is the best way to get things done.

There’s one more thing I think is apropos to share with you, and that’s to keep your approach to saving balanced and in perspective. Frugality can be a double-edged sword, as I often have trouble spending money on myself even when it would be worth it. This can be, for example, buying a cheaper substitute that isn’t really what I wanted or doesn’t adequately accomplish the purpose I wanted it for, or it could be a foregone opportunity, such as museums I didn’t visit or lunch or movies with my friends that I was reluctant to pay for. To be sure, my ideas wouldn’t necessarily correlate with that sort of excessive frugality, but it’s best to be conscious of it now so you’ll be aware of it later. Just be sure that you keep doing what’s best for you overall and put the right importance on other things that matter to you!

All right, I know I said one more thing, but I suppose really it’s two. After all, I would be missing a golden opportunity were I to end this without a frugal pun! “Dumpster diving is a great way to net free stuff. The best, though, is on the side of the highway – that’s how you really get the pick of the litter!”

Thank you for reading!

How to Improve Your Finances this School Year

by

A new school year brings the sense of a fresh start, even for those of us who are largely unmoored from the academic calendar. Even with a PhD trainee’s limited income, we can harness our renewed optimism for our finances each September. If you are willing, there are steps you can take this week, this month, and this year to improve your relationship with money, your money management skills, and your net worth.

A version of this post was first published on GradHacker.

improve your finances

Improve Your Finances This Week

Identify your life values

There is no single right way that everyone should use their money; your own individual best practices will be based on your life values. Your values are the concepts that you hold most dear; examples include freedom, fun, family, health, excellence, and so on. Identifying what is most important to you will bring great clarity to your financial decisions. You can choose to spend more resources fulfilling your values and dispense with things and activities that do not.

Further reading: Determining Your Values and Financial Goals in Graduate School [A Personal Finance for PhDs Guide]

For example, when my husband and I identified ‘community’ as one of our top values, we knew we wanted to allocate more money for traveling to visit our families and attend weddings. To enable that, we cancelled our cable TV and stopped eating out for convenience, as those areas of spending did not correspond to any of our values.

Create a balance sheet

A balance sheet is a snapshot of your entire financial life – every asset and every debt listed by type, financial institution, balance, etc. If you have any confusion or disorganization in your finances – or the tendency to bury your head in the sand – a balance sheet will help you see your whole situation at a glance. If you have debts, you can also include the minimum payments and interest rates so that you can easily decide which payoff to tackle first. Your balance sheet may reveal vestigial accounts or other duplications that you can clear up this week.

Start tracking your spending

My top financial ‘tip’ for grad students newly interested in their finances is to implement a tracking system for all their financial transactions. The simple act of tracking is often enough to start optimizing behavior. You can do this manually with anything from a notebook and pen to an app such as Wally or automatically with software that links to your accounts such as Mint or Mvelopes.

Create a prioritized goal list

Taking your values and balance sheet into consideration, list the current financial goals you would like to reach. You may be able to work on some of those goals simultaneously. For the goals that should be tackled sequentially, choose the order in which you will focus on them so that you can make quick progress. For example, if you have multiple debts you want to pay off, use the debt snowball or debt avalanche method to create your prioritized list.

Improve Your Finances This Month

Implement a frugal strategy

Trying out a new frugal strategy is a great way to unblock what can feel like an impossibly tight financial situation. You don’t have to commit to it forever – just give it a test run so that you can evaluate how much money you save and how it affects your life. (Bonus points if the frugal strategy you choose reduces a fixed expense!) You can find tons of suggestions online (example: 66 Ways to Save Money in New York City) or among your peers.

Further viewing/reading: A Month of Frugal Tip for PhDs-in-Training by PhDs(-in-Training)

Join the Mailing List to Download Frugal Tips for PhDs-in-Training

The download includes 30+ frugal tips for PhDs-in-Training with links to video and additional written content.

You'll receive 1-2 emails per week to help you make the most of your money during your PhD training.

We won't send you spam. Unsubscribe at any time. Powered by Kit

Optimize your food spending

Food spending is a prime target when you are trying to free up more money, as it’s among the largest variable expenses in a grad student’s budget. Check out these articles on how to get the most for your money:

Add to your emergency fund

Even a small amount of available cash can save your bacon in the case of an emergency. If you have nothing put aside for emergencies right now (46% of Americans surveyed couldn’t even cover a $400 emergency), set a goal of saving $1,000 for that purpose. If you already have $1,000, consider setting a larger goal based on your current monthly expenses or your insurance policy deductibles. You can add to your emergency fund with a monthly savings goal or in dribs and drabs as you free up cash.

Improve Your Finances This Year

Right-size your housing and transportation

As housing and transportation eat up a huge fraction of a grad student’s income, it’s important to pay only what you can afford or – in some high cost-of-living areas – as little as is feasible. If you realize that you are overspending on rent or your car, it will take some time and doing but you can correct the situation by moving, getting a roommate, selling your car, switching to cycling for your commute, etc.

Develop a side income

There are two ways to free up more money each month: spend less or earn more. Grad students tend to focus on the “spend less” side of that equation, forgetting that “earn more” is sometimes also an option, depending on the source of your funding and your department’s culture. A judiciously chosen side job can advance your career as well as generate income, providing you with opportunities far beyond what your program can.

Increase Your Income

Join the mailing list to receive our 7-part video series, "How to Increase Your Income as a Graduate Student," including side hustles and passive income.

We won't send you spam. Unsubscribe at any time. Powered by Kit

Regularly invest and/or pay off debt

In some situations, the best a grad student can do is keep his head above water financially in grad school, but in others it is possible for a grad student to increase her wealth. The best way to increase your net worth is to make saving, investing, and/or paying down debt regular and automatic (pay yourself first). Don’t only use frugality or a side income to free up cash flow that is then lost to the ether. Commit that cash flow to working for you through automatic monthly transfers to your savings account, investments, or loans.

Free Email Course: Investing for Early-Career PhDs

Sign up for the mailing list to receive the free 10,000-word email course designed for graduate students, postdocs, and PhDs in their first Real Jobs.

We won't send you spam. Unsubscribe at any time. Powered by Kit

What are you doing this week, month, or year to improve your finances?

Why You Should Apply for Fellowships Even If You’re Fully Funded

by

PhD students are funded by a variety of sources: research assistantships, teaching assistantships, graduate assistantships, training grants, and fellowships. It’s typical to be funded by two or more of these difference sources over the course of your PhD, and the funding source can change year-to-year or even semester-to-semester. While the differences among these funding sources are sometimes subtle, one stands apart from the others: Being funded by a fellowship, particularly a nationally recognized one, is in many ways superior to other forms of funding.

Last week, there was a very interesting conversation on The Grad Cafe about the various ways PhD students are funded. Ultimately, the original poster asked: “Why are fellowships so highly sought after? I am assured full funding (around $30,000) at every school I’m looking at. As someone who isn’t even in grad school yet, is this something I should be concerning myself with?”

I believe every prospective and graduate student should apply for at least one fellowship per year (assuming you are eligible for any). I recently compiled a list of nine portable, broad, lucrative fellowships that prospective PhD students can apply to. Many on that list plus more fund 1st- or 2nd-year PhD students, and there are fresh funding opportunities for PhD candidates with a clear research focus or who are nearing the ends of their dissertations.

Further reading: How to Find, Apply for, and Win a Fellowship During Your PhD or Postdoc

apply for fellowships

Why Fellowships Are a Superior Funding Source

At the graduate level, fellowship funding is usually preferable to assistantship or training grant funding.

1) You Don’t Have to Work

This point may seem unclear until you understand the definition of “work” being used. Assistantships are a part-time job and typically require the assistant to work 20 hours/week. Fellowships are a type of award, which means that they are not tied to a specific work requirement. Fellows are still required to make progress toward completing their degrees, which will of course involve classwork in the early years and research throughout the PhD. But students who receive their full stipends from fellowships are excused from doing an assistantship.

The advantage of being paid by a fellowship rather than an assistantship is more pronounced in some department than others.

The ideal situation for a PhD student, and what a fellowship provides, is the ability to put 100% of your effort toward achieving your professional goals (mostly working on your dissertation).

Teaching assistantships confer extra duties that take away from your available time for dissertation work. (Gaining teaching experience may be an additional professional goal, in which case some types of teaching assistantships may be beneficial to you.)

Research assistantships are a mixed bag. In some fields, such as STEM fields, research assistants spend all their time conducting research that will become part of their dissertations (the topic of which is guided by the projects/funding available in the advisor’s lab). In other fields, the research that a research assistant conducts will not become part of his dissertation, so again that is time taken away from dissertation work.

Basically, for teaching and non-dissertation research assistantships, you have to work on your dissertation above your 20 hr/week job, while fellowships and dissertation research assistantships allow you to devote your full working time to your dissertation.

2) They Often Pay More

Most external fellowships provide a specified amount of money for your stipend plus money to go toward your tuition and fees (either to pay them fully or up to a certain amount). For example, the stipend specified by the National Science Foundation Graduate Research Fellowship Program is $34,000/year, by the National Defense Science and Engineering Graduate Fellowship is $102,000/3 years, and by the Department of Energy Computational Science Graduate Fellowship is $36,000/year.

The stipend provided by an external fellowship is usually higher than the stipend you would have received from an assistantship or training grant. Even if the fellowship stipend is lower, some departments will supplement the fellowship stipend up to or above the departmental base stipend. It’s unusual, though not unheard of, for a fellow to receive a lower stipend than his classmates funded by assistantships or training grants.

Further browsing: PhD Stipends

An external fellowship also confers rare negotiating power to you. Negotiation is likely to be most effective when you are a prospective graduate student with multiple offers to (tactfully) play off one another. The fellowship stipend might be supplemented by a department every year, or the department might pay a one-time bonus to the fellow. If you receive a fellowship while already enrolled in a PhD program, you can also ask for a supplement or bonus. (Be sure to ask other fellows in your department if any extra money was conferred to them.) Something else you can negotiate for is additional years of guaranteed funding after the fellowship ends.

3) Fellowships Give You More Autonomy

Because fellowship money is separate from your advisor’s grants, it can in many cases increase the control you have over your own research pursuits. It may allow you to shift the focus of your dissertation away from the main thrust of your advisor’s research, facilitate a collaboration with another group, or add a side project to your dissertation that isn’t aligned with your advisor’s grants.

4) Fellowship Sometimes Pay Above Your Stipend

In addition to paying your stipend and (part of your) tuition and fees, some external fellowships award you additional money for conference travel or professional development.

A Former Downside

Up through 2019, fellowship funding had one major downside: It was not eligible to be contributed to an Individual Retirement Arrangement (IRA) (unless it was reported on a Form W-2, which was rare). However, starting in 2020, fellowship income is eligible to be contributed to an IRA, eliminating this one major downside.

Further listening: Fellowship Income Is Now Eligible to Be Contributed to an IRA!

Why You Should Apply for at Least One Fellowship (Even If You Don’t Win)

While the best result of applying for a fellowship is that you’ll actually win it, there are positive side effects even if you don’t.

1) Shows Initiative/Effort

Applying for fellowships when you’re not required to (like you have a guarantee or reasonable expectation of funding) shows you are willing to take initiative to further your training and career. You are trying to provide for yourself instead of depending on your department or your advisor. Even if you are not successful, this is an admirable quality; your advisor or potential advisors will probably be impressed at your effort.

2) Good Practice

Applying for fellowships somewhat resembles applying for grants, although usually abbreviated. If you are going to be a career researcher, you will have to develop the skill of successfully pitching yourself and your ideas to funding agencies. Applying for fellowships and predoctoral grants is good practice for the larger grants you’ll apply for later.

The Most Compelling Reason to Apply for Fellowships

The most compelling advantage to winning a nationally recognized fellowship is not its superiority as a funding source or how the process benefits you or your advisor, but rather its role as a CV-booster. Winning a prestigious fellowship early on in your career sets you up well to win larger and more lucrative awards later on. While it is of course possible to win fellowships and grants later in your career without winning one in graduate school, it is advantageous to have been favorably evaluated in the past by another agency. Winning a fellowship in graduate school is an early step in creating a track record of obtaining funding for your research, which is something hiring and tenure committees look for.

Prospective graduate students should apply for at least one large, multi-year fellowship (assuming eligibility) so you, if nothing else, can tell the PIs you’re interviewing with that you did it. If you’re in a STEM field, the NSF GRFP is likely to be your first stop. Once you’re enrolled in graduate school, you should consult with your advisor about which fellowships to apply for, at apply to at least one more in your first and second years and any later years in which you are eligible.

How to Pay Tax on Your PhD Side Hustle

by

One of the biggest challenges associated with a side hustle is paying the right amount of tax on your PhD side hustle at the right time. Understanding your tax due and tax benefits can be even more complicated for PhD side hustles because of the unusual pay structure and benefits that some grad students and postdocs receive.

tax PhD side hustle

If you haven’t yet, read last week’s post on the best financial practices for PhD side hustles, and pay particular attention to how to categorize your side hustle (employment, self-employment, neither) because that designation plays a very important role in taxation. The assumption that your side hustle income is much less than your stipend/salary holds here as well. This post is also US-specific.

What Kinds and How Much Tax You Will Owe

The two types of tax on your PhD side hustle that you should be prepared to pay are income tax and FICA tax.

Income Tax

The income tax on your PhD side hustle income will be equal to your side hustle pay for the year multiplied by the marginal tax bracket your primary job tops out in (e.g., 10%, 15%, 25%). The exception is if your side income bumps you into the next higher tax bracket, in which case part of the income will be taxed at your previous marginal tax rate and part at the higher marginal tax rate.

FICA Tax/Self-Employment Tax

The FICA tax rate for each person is 15.3% (12.4% for social security and 1.9% for Medicare; in 2017, social security is not taxed on the portion of your income that exceeds $127,200). If you are an employee, you pay half of that rate (7.65%) and your employer pays half. If you are self-employed, you pay both halves, which is called self-employment tax.

(Graduate students do not pay FICA tax on their stipends because they either fall under the student exemption or their income is not considered wages and is therefore not subject to FICA tax. Postdoc fellows and other fellows also may not pay FICA tax because their income is not considered wages.)

How to Pay Your Tax throughout the Year

If you have tax withholding set up accurately at your primary job, it will only cover the tax due on your primary income. You will additionally need to send the IRS regular payments for the tax on your PhD side hustle income.

Withholding

If you are an employee in your PhD side hustle, you will file a W-4 with your side employer to have income and FICA tax withheld from that paycheck. The simplest thing to do is claim “0” allowances on your side hustle W-4 and the appropriate amount of allowances on your primary job W-4 (if you have one). For a more detailed calculation, complete the Two-Earners/Multiple Jobs Worksheet on the second page of the W-4.

Further reading: 3 Tax Considerations for Those with Multiple Jobs

If you are self-employed in your side hustle and have tax withheld at your primary job, you can increase your withholding at your primary job to cover the additional tax on your PhD side hustle by filing a new W-4 with fewer allowances and/or an additional dollar amount to be withheld from each paycheck. This is a good strategy if your side hustle income is very regular.

Quarterly Estimated Tax

If you are self-employed with an irregular side income and/or you do not have tax withholding on your primary income, you will probably be required to file quarterly estimated tax.

Quarterly estimated tax payments should be familiar to most PhDs who at some point received non-compensatory income such as from a fellowship or training grant. If you currently receive non-compensatory pay and are making quarterly estimated tax payments, simply adjust your calculations on Form 1040-ES to account for your PhD side hustle income.

For those not currently making quarterly estimated tax payments, the process is relatively straightforward. You use Form 1040-ES (page 8) to estimate your income, tax due, and existing tax withholding for the year. If you will owe more than $1,000 in additional tax and don’t fall into an exception category, you are required to pay that additional tax over four payments taking place in April, June, September, and January. A quick way to take care of this if your tax withholding at your primary job is accurate (you didn’t receive a large refund or owe a lot of additional tax on your return last year) is to calculate your additional income and self-employment tax due for each quarter when the quarter ends. Multiply your income for the quarter by 15.3% plus your marginal tax rate and use that amount as your estimated tax payment.

Further reading: Paying Income Tax throughout the Year

How to Prepare for Your Tax Bill

Whenever you receive side hustle income into your personal bank account (whether that is directly from your client/customer or via your business checking account), you should set aside the appropriate fraction of that income to go toward your tax payments. The best practice for doing this is to set up a separate, dedicated savings account that you solely use for future tax payments. From each bolus of income (or once per month), transfer into your dedicated savings account the fraction of your income that will go toward your income (and self-employment) tax, as calculated above.

Tax Benefits to Having a PhD Side Hustle

One of the best perks of having a PhD side hustle is that it might qualify you for tax benefits not conferred by your primary job, especially if you are a grad student or fellow.

Self-Employed People Can Take Business Deductions

If your PhD side hustle is self-employment, even more tax benefits become available to you, such as business deductions. Keeping your personal and business account separate, as discussed in last week’s post, is also extremely helpful for keeping track of business deductions. You should pay for expenses that have solely a business purpose directly from your business checking account.

Of course, not all business expense deductions apply for every type of business, but some of the common ones that freelancers and contractors can take are:
• travel
• mileage and gas
• home office
• computer
• phone
• internet
• domain fees and hosting
• meals

One step to take when you become self-employed is to diligently track your usage of anything that has both personal and business purposes. You might decide to take a business deduction on the fractional use of those resources.

For example, you should track the mileage in your car, noting the miles used for business. Your internet usage is another deductible expense, again for the fraction of the total time it was in use. If you buy a new computer in a year that you are self-employed, you can deduct part of the cost, but you’ll need to track the fraction of the time that you actually use it for your self-employment work vs. other purposes.

Self-Employed People Can Sometimes Contribute More to Retirement Accounts

Self-employed people are eligible to create retirement accounts for themselves that take the place of a workplace-based retirement account and greatly increase their contribution room above that provided by an IRA.

The additional retirement contribution eligibility is especially beneficial for grad students and postdoc fellows who don’t have access to a workplace-based retirement account (e.g., their university’s 403(b)), and in some cases the self-employment retirement account is a superior alternative to the workplace-based retirement accounts available to PhDs with Real Jobs.

Self-employment retirement accounts come in a few versions, and the best choice is dependent on the number of employees you have, your income, and your desired savings rate. The most common self-employment retirement plans are the individual 401(k), Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE IRA).

Further reading: Avoiding an Expensive 401(k) Plan through Self-Employment; Retirement Plans for Self-Employed People

How do you pay tax on your PhD side hustle? Has your side hustle conferred any tax benefits that you didn’t already receive through your primary job?