Personal Finance for PhDs

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How the Promise of Public Service Loan Forgiveness Has Impacted This Prof’s Career and Family Decisions

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In this episode, Emily interviews Dr. Jill Hoffman, an assistant professor at a university in Portland, OR. Decisions around finances, family, and career are bound tightly together for Jill because of her family’s student loan debt. Jill and her husband Mike are aggressively paying down his student loans while counting on Public Service Loan Forgiveness for hers. Required minimum payments also factored into their decision for Mike to become a stay-at-home parent to their toddler after they moved for her tenure track position. Emily and Jill discuss the rationale behind these decisions and how Jill is documenting her life as an assistant professor and mother on her website, Toddler on the Tenure Track.

Links Mentioned in the Episode

PSLF Professor

Will You Please Introduce Yourself and Your Family’s Finances?

Jill is an assistant professor at a university in Portland, Oregon. She has a PhD and master’s in social work and a bachelor’s in psychology. She has a husband, Mike, and a daughter, Ellie, who is almost three years old. Mike is currently a stay-at-home dad, but his background is in counseling psychology (master’s). When they moved to Portland for her job, it made more financial sense for him to stay home with their daughter than to get a job due to the high cost of childcare and cost of living overall.

Jill and Mike both still have one loan each from their undergrad degrees (2.5%-ish interest). Jill’s loan balance is $8300, and M’s loan balance is $6800. The bulk of their student loan debt from their master’s degrees. Jill has $16,000 remaining on one loan and $38,000 on another loan, both at 7.0% interest. Mike has $5,900 remaining on one loan and $6,300 remaining on another loan, both at 6.5% interest. Their student loan balance totals just under $82,000 as of April 2019.

Their recent focus has been on paying Mike’s student loans. In December 2018 they re-evaluated their debt and had a balance of just over $100,000, and they used some savings and cash flow to pay down the debt to its current balance.

Why Are You Attacking Mike’s Debt and Paying the Minimums on Jill’s Debt?

They are paying the minimum payments on the 2.5% undergrad loans. They are low priority due to the low interest rate.

Jill is enrolled in Public Service Loan Forgiveness (PSLF). Theoretically, after 10 years in the program her master’s degree loans will be forgiven, so they are paying the minimum for now. They are crossing their fingers that it will work out. The minimum payment doesn’t cover even the accruing interest fully or pay down principal at all. (This is because Jill is enrolled in an income-driven repayment plan with a repayment period of greater than 25 years.)

They are paying the minimum on one of Mike’s loans and attacking the higher-interest loan with all extra money each month.

Jill’s undergrad loans do not qualify for PSLF because they were taken out before 2007 (if she recalls correctly). At least for her, just her master’s degree loans qualify for PSLF. She was in undergrad between 2002 and 2006.

How Does Public Service Loan Forgiveness Work?

PSLF is for people who are in certain career types: non-profit and/or government employer may qualify. As Jill works for a public university, she is a state employee and her institution qualifies. Her job post-master’s also qualified for PSLF.

The applicant will make 120 payments perfectly while enrolled in one of the income-driven repayment plans (20-25-year repayment period). At the end the remaining balance will be forgiven. The forgiven balance is not taxed for PSLF, though it is for the income-driven repayment plans.

This is sort of a game because you are supposed to stick to making only the minimum payments even if you could pay more. often, and the payments often don’t even cover the full interest so the loan balance may be growing throughout that time. You have to do everything letter-perfect and hope that your loan balance is forgiven

The first crop of people became eligible for forgiveness in 2017, but the reported rate of actual forgiveness is quite low (1%). Many people who thought they were doing everything right for PSLF have been denied forgiveness.

Further reading:

Given the Low Rate of Actual Forgiveness Occurring, How Does Jill Feel About It?

It’s a daily struggle deciding which loan to prioritize because Jill’s loans are at a higher interest rate.

Mike has loans and is staying home right now. He might qualify for PSLF if he got a job, but it would still take 10 more years of repayment before he would qualify for forgiveness. That time frame was not appealing for them.

If Mike’s 6.5% interest loans are paid before Jill’s four remaining years in the PSLF program are up, they might consider repaying more of Jill’s loans. However, she doesn’t project that to happen within that timeframe. Since they will have to pay for more than 4 years, they’ll wait and see what happens with PSLF and hope for the best.

Emily likes that Jill and Mike are not resting on their laurels and going for the lowest possible minimum payment by both enrolling in income-driven repayment programs and only paying the minimums. Instead, they are attacking the debt in a strategic way. They are being proactive instead of just signing up for everything available to minimize payments.

What Else is Going on for You Financially Aside from Student Loan Repayment?

Jill’s employer contributes to her retirement funds. She is in a pension plan calculated based on years of service and highest gross salary upon retirement eligibility. In addition, they contribute 6% of her salary into a targeted retirement account (doesn’t come out of her paycheck). Jill doesn’t add anything to this for retirement for the time being. This does make her nervous.

Jill and Mike both have retirement funds from previous jobs, but they are not adding to them.

They recently started thinking about contributing to a Roth IRA given their lower current tax bracket vs. their likely higher future tax bracket. They are 34 years old and would like to be doing more on retirement, but they aren’t doing much for that right now.

Once they have the debt paid off, they will have much more cash flow to direct toward retirement or another goal.

How Did You Decide for Mike to Be a SAHD and Did Finances Play a Role?

When they moved to Portland for Jill’s job, Mike didn’t have a job lined up. Their plan was to move and find childcare, and then Mike would get a job. Infant care is really hard to come by and it’s very expensive. They were on a lot of waiting lists and had to pass the time until a spot became available. During that time, they were figuring out finances.

When a spot became available, it was $1,500/mo for full-time infant care at a childcare center. They enrolled and Mike started looking for a job. Jill set up her FSA to pay for the childcare. Ellie was enrolled for about a week when they really delved into their finances if Mike got a job. Their loan payments would go up to at least $1,000/mo, they would be paying $1,500/mo for childcare, plus they would have higher transit expenses and higher income taxes. Then they would be all the time spent at the job and commuting! To them, it didn’t make sense time-wise and financially for Mike to work given his employment prospects. In Ohio, he was making about $45,000/year, and the cost of living was much less. In Oregon, his salary wouldn’t be as much as Jill was making, and his salary would go largely toward loans and childcare. They thought, why not stay home? He was excited to stay home as well.

Emily thinks that what you want for your family doesn’t come into play as much as it should. There are financial arguments for one parent to stay home and financial arguments for both parents to work. But what about what the parents want individually and as a family? Personal finance is not just about numbers and money! In Jill and Mike’s case, there wasn’t a huge financial hit for Mike to become a stay-at-home dad.

Before Mike and Jill had Ellie, they joked about Jill working and Mike being a SAHD without thinking that was a real possibility. It’s kind of cool that it worked out.

What Financial Advice Would You Give Your Past Self?

Jill could have done a few things differently. She would have ended up with significant loans anyway, but could have reduced them by a lot. She went out of state for both her undergrad and master’s degrees, which adds a lot to the debt! Staying in state for the tuition reduction would have been a good idea. For her master’s degree, she could have worked in Pennsylvania first to establish residency and even asked her employer to pay for her master’s degree in part or in full. She didn’t need to go straight from undergrad to master’s. This would have reduced financial burden in the long run.

Out of state vs. in state designation doesn’t matter much to funded PhD students though it does to their departments at public universities. However, for a master’s degree being paid out of pocket, this matters a lot! Employers do fund master’s degrees, especially part-time. Doing the PhD was always Jill’s plan so doing the master’s slower would have been fine.

Mike’s master’s degree was helpful for him to get a better job in Ohio. However, he also chose to go to a private university for his master’s instead of an in-state university, so the costs were a lot higher. Now he thinks he should have gone to the state school he got into and reduce his debt. Once Ellie is in school, having the master’s will help him get another job.

Emily also went to private college and it was a huge price tag that her parents paid. Now, she wants to make public in-state university seem very attractive to her children!

What Is Toddler on the Tenure Track?

Jill started Toddler on the Tenure Track in December 2018 and is still figuring out what it’s about. She wanted to create a space to talk about how she’s doing her junior faculty job with young kids, such as how to be a whole person in a job that’s trying to consume 100% of your energy. It’s her way to document the process of being a whole person in academia and not be sucked into working 24/7 and to document her path through the tenure process. She writes about what’s worked for her and not worked in terms of planning and organization of being a faculty member. That’s a huge part of her job that’s not widely discussed. Some of the strategies she writes about might work for others.

Jill has written some logistical pieces, such as on the process of becoming a tenure-track faculty. She moved cross-country for the job! As a grad student, she would have wanted to know what being a faculty looks like on a daily basis. Educational debt is also a huge part of the lives of people who work in academia, she so also shares about her finances and loan repayment journey.

Go check out Toddler on the Tenure Track if you are a faculty member and parent or aspire to be!

This Grad Student Defrayed His Housing Costs By Renting Rooms to His Peers

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On today’s episode, Emily interviews Dr. Matt Hotze, an administrative director at Rice University and co-host of the Helium podcast. When Matt moved to Durham, NC for his PhD, he immediately purchased a 3-bedroom house and rented the two extra rooms to his labmates. The rent Matt collected from his two housemates covered nearly all of his mortgage payments during his years in grad school, though he had some financial bumps in the road as well relating to house repairs and his dual relationship with his housemates. Ultimately, his decision to sell the property also hinged on his personal relationship with his tenants. Matt shares the overall effect this investment had on his finances and his three key pieces of advice for another early-career PhD considering this route.

Links Mentioned in the Show

PhD landlord

Would You Please Tell Us More About Yourself?

Matt has a PhD in environmental engineering. His advisor moved from Rice University to Duke University near the start of his PhD. He purchased a home in Durham when he moved there in 2005. After he finished his PhD in 2008, he did a postdoc in France and then another postdoc at Carnegie Mellon. Subsequently, he had a career in publishing with the American Chemical Society, serving as the managing editor for four journals, where he learned the business side of science. Currently, he works at an engineering research center at Rice with 80% of his time, and the other 20% of his time is dedicated to the Helium Podcast.

How Were You Able to Purchase a Home During Grad School?

It is no mean feat to buy a home during grad school!

Further reading: Purchasing a Home as a Graduate Student with Fellowship Income

First, Matt was “blessed” to not have any debt from undergraduate degree.

Second, when he started grad school in Houston, lived with his parents for most of his first year and banked much of the stipend. Living with his parents in the suburbs was cheaper because the distance from home to campus impeded going out and spending on entertainment. His motivation to save money was due to his upbringing; since he was able to save, why not do so? He expected there to be some use for it eventually, though he didn’t have specific plans to buy a home when he started. Saving the money wasn’t a big sacrifice as living with his parents was comfortable.

Third, in 2005-2006 the houses in Durham were not that expensive. This was after the dot com bubble burst in early 2000s and the housing crisis hadn’t hit yet. Matt hadn’t necessarily planned to buy, but he saw that the nice, recently built apartments were rather expensive to rent.

Though Matt had enough money for a 20% down payment, he still needed his parents to co-sign his mortgage because his income alone wasn’t sufficient to support the mortgage payments. He bought a modest 3BR home and rented out the other two bedrooms for below market rate. The purchase price for the home was approximately $200,000.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

Matt bought the house even before he moved to Durham, so he never rented there. He felt he was on a time clock to own the home for long enough during his PhD to make the transaction costs worthwhile. He decided he would either buy right when he arrived in Durham or he wouldn’t do it at all.

Emily had a similar thought process a few years into grad school when it might have been possible to buy, but since she was already a couple years into grad school she decided against buying due to the time clock.

Matt’s first tenants in Durham were the other grad students in his lab also moving with his advisor, which also influenced his decision to purchase right away.

What Were the Pros of Renting Out Rooms to Peers?

1) Matt had almost zero housing expenses as the rents from the two bedrooms basically covered the mortgage each month.

2) Matt’s house became the gathering spot for his grad school friends, so instead of spending money going out they would drink beer and play board games at home. (Emily had a similarly inexpensive social experience in grad school.)

3) Didn’t have any issues with the great majority of his tenants.

What Were the Cons of Renting Out Rooms to Peers?

1) Once Matt moved on from his PhD, he didn’t know his tenants quite as well. One of his tenants asked to pay his rent late a couple times. It wasn’t possible to handle this completely professionally because of the social ties between him and his tenants. This did end up working out, but it was stressful to handle this, especially from afar. Matt was especially concerned about being fair to all his tenants but not establishing a precedent that it’s OK to pay the rent late. The rental agreement between Matt and his tenants was helpful in this case, not only the legal components but also to set expectations.

2) The home inspector didn’t catch some flashing around the chimney, so a water leak developed soon after the purchase. Matt used some additional cash he had on reserve (~$500) for this repair, so it was a good thing he hadn’t used all his cash on the purchase. Another time, the water heater exploded. Thankfully replacing it didn’t cause an issue because Matt already had cash built up for these kinds of repairs. Emily references the 1% rule: You can expect to pay 1% of the home’s value in maintenance/repairs each year – but that’s only an average! It can be much higher or lower in any given year.

Why Didn’t You Sell When You Left Durham?

When Matt left Durham for his postdoc in France, it was not a difficult decision to keep the property. He still had tenants in place who would take a couple more years to finish their PhDs, and with three rooms rented out the property was now earning money above expenses. One of Matt’s friend-tenants served as the property manager so he didn’t have to hire a professional company.

At the end of grad school, Matt had a good amount of savings built up, and after the postdoc he had even more saved. This really set him up to be financially successful in subsequent stages of life. He lived in Pittsburgh for his second postdoc. When Matt married his wife and combined their finances, he was able to significantly contribute to their nest egg. It was great to not have to worry about (non-mortgage) debt.

All of this financial success came from the germ of financial parental help during college and that first year of grad school. Good financial fortune and bad financial fortune early in life do not guarantee any particular financial outcome, but certainly put momentum behind your finances one way or another.

How Did You Decide When to Sell the House?

When his friends finished their PhDs at Duke, Matt no longer felt able to hold on to the property. He didn’t have the bandwidth at the time while working in an intense postdoc position and applying for faculty positions to figure out how to hire a property management company from afar. Deciding to sell was really a trust issue. If he didn’t trust his tenants through personal relationships, he didn’t want to be a landlord any longer. It’s not always about numbers, sometimes it’s more about your feelings!

Matt ended up selling in 2009, which was pretty bad timing with respect to the national economy. He sold the house for just about the same price that he bought it for. Even without the property appreciating, the financial benefits he experienced through those years made it a good financial decision. Even though he didn’t make any money on the house, he defrayed all his housing costs when he lived there and continued to make money afterwards.

What Advice Would You Give to a Grad Student or Postdoc Who Is Considering Buying a Home and Renting Out Rooms?

1) Use a calculator to figure out whether buying and renting out rooms in a home makes sense financially in terms of the costs you will incur and the rental prices.

2) Are you OK having uncomfortable conversations with your tenants? Someone will inevitably not pay rent or break something or something stupid in the house. This will happen whether you know the renters or not!

3) Are you comfortable making basic repairs on your own? It’s expensive to outsource it all the time! Are you able to talk with vendors and negotiate? This is a needed skill.

4) What’s your gut feeling on owning rather than renting? You’ll make a good decision!

What Is the Helium Podcast?

Christine and Matt co-host the Helium Pocast. They help early-career researchers – senior grad students to early faculty – navigate the transition from grad school into first faculty position, from landing the position to navigating the position to advancing within the position. They bring on interviewees to talk about career transitions. Check them out! New episodes come out every Tuesday.

How to Make Money without Working: Credit Card Rewards and 529s

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In this episode, Emily interviews Seonwoo Lee, a PhD student in electrical engineering at Georgia Tech. Seonwoo has mastered two methods to earn extra money without “working.” Emily and Seonwoo discuss in detail their experiences with garnering credit card rewards and give both beginner and advanced tips. Seonwoo also explains a 529 hack he discovered to reduce his state tax bill that is applicable in as many as 30 states. They also briefly touch on several other methods to make money without working that are readily accessible for early-career PhDs.

Links mentioned in episode

make money without working

0:00 Introduction

1:14 Please Introduce Yourself

Seonwoo Lee is a PhD student in electrical engineering at Georgia Tech. He did his undergraduate at Cornell. He pursued a number of ways to make money without actually having a second job.

1:48 Why have you tried to make money without working?

Seonwoo says that if you do it right, you can make more money per hour than working a traditional job. He says it gives you more flexibility, since you can do as much or as little as you want.

There is some effort involved in pursuing these strategies, but it’s not as much time you would put into working if you had a second job. Additionally, some people are prevented from officially working in other capacities, either by the terms of their contract or by their student visa. The strategies they’ll talk about are probably available to any PhD student or postdoc.

3:07 What are the two topics that we’ll go into detail discussing? What are some other strategies?

Seonwoo will discuss credit card rewards as well as banking sign up bonuses. Second, he’ll talk about the 529 trick to save money on your state taxes.

Emily mentions other ways to make money without working.

  1. Emily has sold items when she’s moved as part of a downsizing process. She has sold items on craigslist.
  2. Another option is Ebates *. Here, you make purchases through the Ebates platform and you are selling your information in exchange for money.
  3. Emily presents short term investing in taxable accounts as an option to make money without working. She and her husband paid off student loans through mid-term investing.
  4. Other options are receipt apps like Ibotta, where you upload your receipts and you sell your information to get cash back.
  5. Also, there is the strategy of “car wrapping,” which is wrapping your car in an advertisement and you receive money based on how much you drive. Emily recommends listening to the How to Money podcast for more information on car wrapping.

* This is a referral link. If you sign up and spend $25 through Ebates, you’ll receive a $10 bonus to your account and I’ll receive a referral fee. Thank you for supporting Personal Finance for PhDs!

7:19 How do the credit card rewards and sign up bonuses work?

Seonwoo begins with the caveat that if you can’t manage credit cards responsibly, you should not pursue credit card rewards in any form. If you pay any interest at all when you do this, you are likely not going to reap the benefits of rewards. Emily adds that you already need a good or excellent credit score to pursue these strategies. If you carry a balance on your credit card, this strategy is not for you. Emily says make sure you are using your credit card like a debit card, and if you are you can consider this strategy.

Further reading: Perfect Use of a Credit Card

Seonwoo says that plenty of credit cards offer sign up bonuses. These require you to spend between $500 and $4,000 within the first three months of signing. The bonuses will vary from credit card points to straight cash. The offers will range from $100 to $500 in cash or 30,000 to 100,000 points. Seonwoo says there are ways to meet these minimum spending requirements without spending more than you normally would.

Emily talks about fitting these credit cards into your normal spending. She signed up for a credit card with a minimum spending requirement of $3,000 over three months. She had to put everything she was purchasing on that one card. She picked a time of year when she had to pay for car insurance and flights. She timed signing up for the credit card with when she knew she had above average expenses. Reaching the minimum spend requirements is a hurdle for people with lower income.

Seonwoo says you can see if you can pay your rent with a credit card. He says the fee may be 3%. If that is the only thing stopping you from pursuing a sign up bonus, do the math to see if the rewards are worth it. You can see if you can put tuition or fee charges on the credit card. You can see if you can pay your bills months ahead of time. He says you can buy grocery gift cards to get the charge on the credit card, but then you can spend that gift card over a longer period of time.

Emily says that someone new to this can try it with existing spending, then they can try manipulating their spending.

13:00 Is cash back or points more valuable to a graduate student?

Seonwoo says that cash back is much easier to start with and understand. There are only so many cash sign up bonuses. If you like to optimize things, credit card rewards will be more valuable if you use the rewards for travel.

Emily says that there are cards with a regular cash back rate, like 1-2% back on spending. She says that is a good way to start. Then the next level would be switching to actively pursuing credit card rewards. To make rewards lucrative, you have to be able to redeem them. She explains that in Durham, North Carolina, she couldn’t be loyal to any one airline. But in Seattle, Washington, she makes use of the Alaska Airlines credit card and its reward system.

16:18 What are the pros and cons of the annual fee situation?

Seonwoo says a lot of cards that have sign up bonuses waive the annual fee in the first year. Seonwoo’s strategy is that he signs up for the card, meets the minimum spend requirement, and by month 11 he has decided he won’t pay the annual fee and he will close the card. He says some cards are worth the annual fee, but he wouldn’t recommend keeping the annual fee card to people with lower income.

Seonwoo says that if you cancel within 30 days of being charged the fee, you can often get a refund. Ideally, set up a spreadsheet and reminders to track your credit cards.

18:54 How much money have you made using this strategy?

In his best year for strictly cash, Seonwoo has made about $2,200 to $2,500 from sign up bonuses. He says he has more credit cards and points than he knows what to do with. Most of his rewards have been in credit card points.

Emily says when she was in graduate school and pursuing cash sign up bonuses, she and her husband together made about $1,000. This can alleviate budgetary stress.

20:38 Anything else you want to add on this topic?

Seonwoo brings up how this affects your credit score. In general, when you apply for a credit card, there is a small hit because you have an inquiry on your report. He emphasizes that the point of your credit score is to help you get low interest rate loans or good rewards credit cards. If you’re not applying for a loan in the near future, you can use the credit score for new credit cards. He applied for cards until he started getting denied. He waited a few months, then tried again and got approved. He says people stress out a bit too much about their credit score. He says people should recognize the point of the credit score.

Emily points out that there are positive affects of having several credit cards. She also mentions some cases where you need to keep your credit score high, like when you apply for a new residence or take out a mortgage.

Further reading: How to Establish Credit in the US

24:24 How do banking sign up bonuses work?

Seonwoo says that the main difference is that instead of requiring you to spend money, banking sign up bonuses require you to already have money. You sign up for a new checking account, get a couple of direct deposits in there and keep it open for at least six months, and sometimes make some transactions. You can get between $100 or $350 for signing up for that account. Some have fees, but the bank may waive the fee for students or on other terms.

Emily mentions minimum balances, and Seonwoo clarifies that high balances requirements are usually for savings accounts. Checking accounts have minimum balance between $1500 and $3000, and the percent return is 10% to 20% in six months. This is a good option for your emergency fund.

Seonwoo recommends the blog Doctor of Credit, who has several blogs on these topics.

28:54 What is a 529? What are the benefits of it?

Seonwoo explains that there are two types of 529 plans. One is a prepaid tuition plan, which he is not talking about. The other type is an investment plan. At both the state and federal level, it is not taxed when you withdraw it for education expenses. Emily compares this to an IRA, where you are not taxed on the growth of the money if you use it for retirement. Seonwoo calls it a Roth IRA for education.

Seonwoo says 30 states and the District of Columbia offer a state income tax deduction for contributing to your 529 plan. Most states require that you have a plan with that state, but they don’t require a net contribution for the year. He says you can contribute the money to get a deduction, then pull it out to pay for your expenses.

Emily says cost of living expenses can be considered qualified education expenses for the 529 plan. She explains that you can put money into a 529, then take it out to pay rent, and then you get a state tax deduction or credit. Seonwoo says even if your living expenses are $0, you can still do this. The amount is set by the university’s financial aid office room and board estimate of the cost of attendance.

Seonwoo explains his specific example at Georgia Tech. The financial aid office lists the cost of attendance estimate for room and board as more than $10,000. In Georgia, a single taxpayer can deduct up to $2,000 of a 529 contribution. His marginal tax rate is 6%, so a deduction of $2,000 saves him $120 per year in state taxes. So, he contributes $2,000 to the 529 plan and leaves it in there for 10 days, then he takes it out. This is all it takes to get the tax deduction.

36:37 Where can we go for more resources?

Seonwoo says he learned about this by going through his state tax return to look for deductions. On his blog, he has a college tag and he has a post about the 529. The site Saving for College is a good resource for 529 plans.

Emily says this is a strategy that you need to investigate for your own state. Seonwoo mentions that there are other education credits and deductions available, but you can’t double count expenses. This 529 trick makes use of the living expenses, because this is unique to this tax benefit.

Seonwoo recommends printing to PDF the page from the financial aid office that documents the cost of attendance. This is documentation to keep if you’re audited.

40:50 Final Comments

This episode is about ways to alleviate budgetary stress by leveraging your assets and optimizing your usage of financial accounts.

41:17 Conclusion

What to Do With Your 401(k) or 403(b) When You Start Grad School

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One of the common perks that companies and organizations give to their employees is access to a workplace-based retirement account such as a 401(k) or 403(b). They may even match your contributions to a degree! Unfortunately the great majority of universities do not give their graduate students access to their 403(b)s. (This does happen rarely, so it’s worth inquiring about.) If you had a 401(k) or 403(b) in a prior job, what do you do with that account when you leave your job for grad school?

Further reading: Financial Reasons to Work Before Starting Your PhD

401k grad school

Your Three Options for Your Workplace-Based Retirement Account

In general when you leave a job, you have three options for what to do with your 401(k) or 403(b).

Leave It Where It Is

Most of the time, your former employer will permit you to leave your 401(k) or 403(b) where it is and continue to manage the account for you while you are in grad school. Employers usually have a minimum balance requirement to maintain these accounts, so your account has to meet that bar.

The upside to this approach is that you don’t have to do anything, and if you liked the investment options and account fees, you can keep using it.

The downside to this approach is that you have to stay in some degree of contact with your former employer and go through them if you want to make any changes to the account.

Roll to Your New Workplace-Based Retirement Account

If you have the option to open a 403(b) with your university, you may be able to roll your previous 401(k) or 403(b) into that account. Again, this opportunity is rarely extended to grad students.

Roll to an IRA

You always have the option when you leave a job to roll your 401(k) or 403(b) into an Individual Retirement Arrangement (IRA). An IRA’s tax advantages are similar to those of a workplace-based retirement account, but you manage the account yourself instead of your employer managing it. Be sure that you have instructed your firms to execute a “rollover” directly to your IRA and not to cash out your account and send you a check, which would be a hassle to correct. You can use an existing IRA account or open an IRA account specifically to receive this transfer.

Which Option Should You Choose?

The general personal finance advice is to always roll your 401(k) or 403(b) when you leave an employer to avoid eventually having accounts scattered across many employers and potentially losing track of one. Whether you should roll into your new employer’s 401(k) or 403(b) or your IRA is debated. If you are trying to optimize the investments inside your retirement account, IRAs have an advantage because the entire world of investment options is open to you, whereas the options inside a 401(k) or 403(b) are only what your employer decides to make available. Sometimes, 401(k) or 403(b) plans are more expensive than what you can get inside an IRA, and since cost minimization is a key tenant of successful investing, again IRAs are preferred.

However, this general advice is not necessarily fully applicable to grad students.

First, your options are mostly likely to be either to leave your 401(k) or 403(b) where it is or to roll it into an IRA.

Second, you may not want to manage your own investments. While managing your IRA can be easy and hands-off, it may still be intimidating, and some students might prefer to simply choose among the options offered by the former employer to opening and managing an IRA.

Third, the investments available to an individual investor inside an IRA may not be as attractive as the institutional-level investments available inside a 401(k) or 403(b) in terms of their fees. To paint with an overly broad brush, 401(k) and 403(b) options at smaller companies and organizations may be more expensive than what you can buy inside an IRA, whereas 401(k) and 403(b) options at larger companies and organizations may be less expensive than what you can buy inside an IRA. So if you were employed by a university or a large company before starting grad school, compare the cost (expense ratios) of your current investment options with those at the brokerage firm you’re considering for your IRA. It may turn out that your existing options are more favorable.

Further reading:

My advice to entering grad students is to roll your 401(k) or 403(b) into an IRA unless you have high-quality, inexpensive investment options inside the workplace-based retirement account and do not want to manage your own account.

Other Advice Related to Retirement Saving

You’re on a great path already by starting to invest for retirement through your job. If at all possible, continue to make excellent choices related to retirement investing during grad school.

Contribute Money to Your 401(k) or 403(b) While You Still Can

It’s a great idea to kick your retirement savings rate into an even higher gear in the months you have left at your job. You’re likely to not have access to a 401(k) or 403(b) again for quite a while, so any additional money you can get into that tax-advantaged account will be a huge boon to your post-PhD self. (Plus, you’re forcing yourself to deflate your lifestyle, which you’ll have to do in a few months anyway!)

However, don’t become so zealous about retirement saving that you compromise your cash position. It’s going to take a good amount of cash to transition into grad school between moving costs, start-up expenses, and university fees. You don’t want to put a lot of money inside your 401(k) or 403(b) only to turn to credit cards to make it until your first grad school paycheck.

Keep Investing for Retirement!

Yes, it is sometimes possible to invest for retirement during grad school, but it heavily depends on your stipend, the local cost of living, and the rest of your financial situation. If you have no pressing debt, enough cash savings for emergencies and short-term expenses, and some excess cash flow, please continue to invest for retirement!

Further reading:

If you have W-2 income as a grad student (typically from an assistantship) in a given calendar year, you can contribute to an IRA. If you don’t have IRA eligibility due to receiving only non-W-2 (typically fellowship) income in a given calendar year, don’t let that stop you from investing for retirement! You can still use a taxable brokerage account. Between tax-efficient investments and your low tax bracket, you are likely to still enjoy tax benefits of investing even outside of an IRA.

Further reading:

Consider Traditional to Roth Conversion During Grad School

During your time in grad school, you may be in a lower tax bracket than you were while at your previous job. Grad students, unless married to someone with a much higher income, are usually in the 12% marginal tax bracket at the highest.

If you have any money in a traditional 401(k), 403(b), or IRA (which you certainly would if you ever received a retirement contribution match from your employer), consider converting it from traditional to Roth during your lower-earning grad school years. It’s pretty unlikely that you’ll ever be in the 12% (or lower) tax bracket again after you finish grad school due to both your personal earning potential and today’s rock-bottom income tax rates, so it makes sense to do the conversion at that low tax rate to gain the benefits of a Roth IRA. (People are flocking to do this type of conversion even in much higher tax brackets!)

Further reading: Why the Roth IRA Is the Ideal Long-Term Savings Vehicle for a Grad Student

When you do the conversion, you’ll have to pay income tax on the full balance of your traditional retirement account. Before you start the conversion process, be sure that you 1) have enough cash to pay the tax and 2) are not bumping yourself into a higher tax bracket with that income infusion.

You don’t have to rush to do this in your first full calendar year as a grad student if you’re not ready, but you should do it as early as you can, and keep an eye on that year in which you expect to finish and get a higher-paying job.

This conversion can be slightly complicated if you only want to convert part of your traditional money in any given year, so be sure to discuss your plans with the brokerage firm that houses your IRA.

Conclusion

Great job on contributing to a 401(k) or 403(b) prior to starting grad school! The positive financial habits you’ve already cultivated will serve you well during and after grad school. If you want to take any steps at all with your existing workplace-based retirement account, they are quite straightforward and easily accomplished.

How to Start Grad School on the Right Financial Foot

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Starting a PhD program is, professionally and personally, one of the most exciting times of life. You’re meeting people who will be your peers and advisors in the coming years whose research interest align with yours, getting acclimated to a new university and city, and of course starting a fresh school year. However, many first-year PhD students, as they’re going to happy hours to get to know their cohorts and buying their textbooks, are thinking to themselves: “Am I going to make it until my first paycheck arrives?” Financially speaking, starting a PhD program is one of the most challenging times of life as well.

The financial challenges of the transition into a PhD program are myriad and the resources are likely to be few. Moving to a new place and starting the school year are expensive endeavors, and sub-optimal decisions around housing and transportation may reverberate in your finances for years to come.

I present this article not to discourage you in what should be an invigorating and hopeful experience, but so that you have time to prepare for its unique financial demands. Starting grad school on the right financial foot means that you are poised for financial success throughout your PhD instead of reeling from the initial financial blow and playing catch-up for months and years to come. Here is what you can do in the months leading up to your transition into grad school to start in a place of financial strength.

grad school right financial foot

Draft a Budget ASAP

It’s vital to put your stipend offer in context as early as possible. The number may strike you as generous-for-a-stipend or meager, but until you know something about the local cost of living it is rather meaningless.

The best way to get an idea of how far your stipend will go is to start drafting a budget and use approximate numbers until you lock in various aspects of your living expenses. Two starting points are the Living Wage Calculator and the estimated room and board from your university’s financial aid office. Neither one of these numbers will prove to be totally accurate (I hope they are both overestimates of what you will pay) but it’s a start for the triangulation.

Your draft budget should include:

  • The income tax you expect to pay,
  • Your necessary expenses, i.e., housing, transportation, utilities, groceries, household consumables, clothing, etc.
  • Your discretionary expenses, i.e., restaurant and bar spending, travel, entertainment, etc.), and
  • Your education expenses, i.e., tuition and fees required to be paid out of pocket, course supplies, etc.

Further reading: How to Read Your PhD Program Offer Letter

To a degree, you can use your current expenses (if you track them) to estimate what your future expenses will be, possibly with an adjustment for the shift in the cost of living.

It’s quite difficult to drill down into the specifics of what you will spend in a job/life that you’re not yet in, especially if you are not currently tracking your expenses. Therefore, you can use placeholder percentages to help you estimate your expenses and guide your decisions. For example, the Balanced Money Formula states that you should not spend more than 50% of your net (after tax) income on all of your necessities together (including minimum debt payments). This is a challenging benchmark for grad students to adhere to, especially in high cost of living areas, but it illustrates how important it is to keep your necessary expenses in check to the greatest degree possible.

Further reading:

Thoroughly Research Your Housing Options

Housing is by far the largest expense in virtually every grad student’s budget, and first-year PhD students are expected to make this enormous financial decision with little to no insight into the local area. The result is that graduate students often overextend themselves in their housing costs, which are financially, logistically, and emotionally difficult to change.

Starting grad school on the right financial foot means locking in your fixed housing and transportation costs at a reasonable level for your stipend. The general rule of thumb is to spend no more than 25-30% of your net (after tax) income on housing. This guideline proves impossible for many if not most PhD students, who may be paid too little, live in an expensive area, or both.

Further reading: How Much of Your Stipend Should You Spend on Rent?

Particularly in those challenging housing markets, the best course of action to find the most suitable housing (even if you spend more than the guidelines) is to start your search early and thoroughly research your options. I recommend starting your research with a housing survey conducted by your university or graduate student association (if one exists) and senior grad students who are paid a similar stipend to what you will be (e.g., 3rd years and up). From these sources you can ascertain the price range you can expect for housing and potentially tips on the best locations, housing types, and even specific complexes or landlords to pursue.

Further reading: Your Most Important Budget Line Item in Graduate School and Why You Need to Re-Evaluate It

A note on on-campus or university-affiliated housing: On-campus housing is attractive for students moving from a distance because it short-circuits this whole decision-making process. But this type of housing was not all created equal. At some universities, the university housing is subsidized, which means there is likely fierce competition to live in it. At other universities, the university housing is more expensive than comparable non-affiliated housing. You won’t know whether university housing is a good deal and worth pursuing until you talk with current grad students.

Further reading and listening:

Go Frugal on Transportation

Alongside figuring out your housing options and eventually committing to something, you need to decide how you will get around town. If you don’t own a car, you might need to buy one. If you already own a car, you have to decide whether to bring it with you or sell it.

Owning a car, even without a car loan, is a very expensive undertaking. Beyond the cost of the car itself, you typically have to pay for insurance, parking, gas, registration fees, inspection fees, taxes, maintenance, and repairs.

If it is feasible to live car-free in your new city and you don’t currently own a car, I recommend trying to live car-free for your first year. You can always reassess and buy a car at a later time if you decide you want one.

If you decide to buy a car or keep the car you already own, make sure you globally assess your expected costs (not just the best-case scenario!) and write them into your budget. An expensive or newer car costs you more not just in the purchase price but in your insurance premiums as well.

Your transportation and housing expenses are necessary to fix in concert to a degree. If you decide to live car-free, you might choose to pay more to live closer to campus or on a convenient bus route. If you decide to buy or keep a car, you can offset some of those costs by finding less expensive and less convenient housing.

Create a Transition Budget

Most graduate students experience what I call the long and expensive first month of grad school, though I have noticed some universities are working to change this pattern. You must prepare for this long and expensive first month prior to starting your transition to grad school.

The expense of the first month comes from your move. First, the moving expenses themselves: your and your possessions’ transportation to your new city plus the cost of feeding yourself and so forth during that time. Second, the start-up expenses for your new place: first (and last) month’s rent and security deposit, deposits for your utilities, furniture, and stocking your pantry. Third, the expenses of a new school year/term: any money that you must pay to your university in a lump sum and the expenses associated with your coursework.

The long first month refers to the length of time from when you move to your new city until you receive your first paycheck. Personally, I showed up for orientation in mid-August and didn’t receive my first paycheck until the last day of September. Of course, that time includes all your regular living expenses, on the back of your moving expenses.

You want to be sure going into the long first month that you can come out the other side without racking up debt. Saving cash in advance to pay for the transition is the best solution, and a transition budget will help you estimate the total cost.

Build Your Financial Foundation Now

Because you have several months between now and your matriculation into your PhD program, you have the opportunity to establish your financial foundation prior to the challenges of this transition. By financial foundation I am referring to saving cash for the transition, saving an emergency fund, paying off debt, and/or investing – whatever is most appropriate for you right now.

If you currently have a full-time job, you have the most opportunity to shore up this foundation, but even as a student or part-time/gig economy worker, it is still possible to a degree. It will be well worth a few months of sacrifice, either in terms of earning more through a side hustle or spending less through frugality, to start grad school on the right financial foot instead of a few steps behind.

Further reading: Financial Reasons to Work Before Starting Your PhD

After you save the money you need for your transition into grad school, consider whether you can pay off any of your current consumer debt completely (e.g., credit cards, car loan, medical debt, IRS debt). While you can defer student loans while you are in grad school, these other kinds of debts will still require minimum payments even while you receive your stipend, so it’s worthwhile to attempt to knock them out completely.

Further reading:

If you spend the time and effort now on planning out your expenses and saving money, once you matriculate you will be able to focus solely on the stimulating new people and experiences you encounter instead of experiencing financial stress. Starting grad school on the right financial foot by locking in a good deal on housing and not allowing yourself to fall into credit card debt also sets you up for financial success throughout your PhD. An ounce of prevention is worth a pound of cure.

If you would like to me to work with you on navigating your financial transition to graduate school, please check out my financial coaching program exclusively for rising grad students.

Fellowship Income Can Trigger the Kiddie Tax

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The Kiddie Tax is an alternate, higher rate of calculating tax due that applies to young people. While it was intended to ensure that wealthy parents paid their full share of tax on their investments, it also sometimes applies to graduate students whose income comes primarily from a fellowship or training grant.

Kiddie Tax fellowship graduate student

If you have found this article through search, it’s likely that your (software or human) tax preparer has determined that you owe the Kiddie Tax. This article will help you understand what the Kiddie Tax is, who it applies to, how it is calculated, and how to avoid it in the future.

What is the Kiddie Tax?

Back in the early 1980s, finding tax shelters (i.e., legal ways to avoid paying tax) was all the rage because tax rates were much higher than they are today. The top marginal tax rate was reduced to 50% in 1981 and finally to 28% in 1988 with the last major tax reform prior to the Tax Cuts and Jobs Act (source).

One of the tax shelters was for parents to put income-generating assets in their minor children’s names. The children were (presumably) in much lower tax brackets for investment income than their parents, so overall the family paid less in tax for those assets (source).

In 1986, the “Kiddie Tax” was enacted to close this loophole. Under the Kiddie Tax, a child or young adult’s unearned income is taxed at a higher rate than it would be if they were older (with all other factors being the same).

How Does the Kiddie Tax Affect PhD Students?

The way the Kiddie Tax is written and structured makes sense for the purpose of preventing wealthy parents from sheltering their income using their children. However, it has an off-label effect on PhD students.

The Kiddie Tax applies to all children through age 17, some children through age 18, and some students through age 23. It applies to “unearned income,” which includes not only investment income but also income from fellowships, scholarships, and training grants.

This means that a graduate student under the age of 23 whose income is from a fellowship may be taxed not at the ordinary income rates that they will be at age 24+ but rather at their parents’ marginal tax rate (if it is higher than their own).

(The Tax Cuts and Jobs Act, passed at the end of 2017, changed the alternate tax rate to be the one used for estates and trusts rather than the parents’ marginal tax rate, which it had been historically. This negatively affected college students from low-income backgrounds, who are often funded by scholarships and grants. At the end of 2019, the Kiddie Tax rate was changed back to the marginal tax rate of the parents, which was also retroactively applied for 2018. If you paid the Kiddie Tax in 2018, an amended return may be warranted.)

The PhD students most in danger of the Kiddie Tax applying to them in a way that will massively increase their tax due are those who received fellowship (awarded) income for an entire calendar year, e.g., January of the first year through December of the second year.

Who Has to Pay the Kiddie Tax?

The Kiddie Tax does not apply to every graduate student on fellowship, though it applies to many.

The instructions for Form 8615 lay out who has to file the form and (potentially) pay the Kiddie Tax. There are five qualifications for being subject to the Kiddie Tax, all of which must apply. If any one of the following is not true for you, you aren’t subject to the Kiddie tax.

1) You had more than $2,200 of unearned income.

Taxable fellowship and scholarship income counts as “unearned income.”

The definition of “unearned income” from p. 1 of the instructions for Form 8615 is:

“For Form 8615, “unearned income” includes all taxable income other than earned income. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.”

2) You are required to file a tax return.

The Form 1040 instructions (p. 8-11) answer the question of who has to file a return for 2019.

Chart A (p. 9) is for most people under age 65. It states that you must file a return if you are single and your gross income is at least $12,200.

Chart B (p. 10) is for dependents. You are required to file a tax return if you are single and:

  • “Your unearned income was over $1,100.
  • Your earned income was over $12,200.
  • Your gross income was more than the larger of
    • $1,100, or
    • Your earned income (up to $11,850) plus $350″

For the purpose of Chart B only, taxable scholarships and fellowships are “earned income” while “unearned income” includes taxable interest, ordinary dividends, and capital gains distributions.

If your gross income was less than $11,850 and your unearned income (taxable interest, ordinary dividends, and capital gains distributions) was less than $350, you do not need to file a tax return and are not subject to the Kiddie Tax.

Alternatively, you can use the IRS’s Interactive Tax Assistant to determine whether you are required to file a return: Do I Need to File a Tax Return?

3) You are a student under age 24

To be subject to the Kiddie Tax, you must be (Form 8615 p. 1):

  1. “Under age 18 at the end of 2019,
  2. Age 18 at the end of 2019 and didn’t have earned income that was more than half of your support, or
  3. A full-time student at least age 19 and under age 24 at the end of 2019 and didn’t have earned income that was more than half of your support.”

Full-Time Student Status

Form 8615 refers to Publication 501 for the definition of ‘full-time student’ (p. 12):

“To qualify as a student, your child must be, during some part of each of any 5 calendar months of the year:

  1. A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or
  2. A student taking a full-time, on-farm training course given by a school described in (1), or by a state, county, or local government agency.

The 5 calendar months don’t have to be consecutive.

Full-time student. A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.”

You do not have to be a student throughout the calendar year to be defined as a student and subject to the Kiddie Tax. You are considered a student if you are a full-time student in (part of) 5 calendar months, which do not have to be consecutive.

Support Test

Defining support and who/what provided it is the trickiest part of determining whether you are subject to the Kiddie Tax. First, you must determine your support, and then calculate whether your earned income amounted to more than half of your support.

The Form 8615 instructions defines support as (p. 1):

“Support. Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship you received isn’t considered support if you’re a full-time student. For details, see Pub. 501, Dependents, Standard Deduction, and Filing Information.”

Publication 501 includes the Worksheet for Determining Support (p. 15), which you must go through in detail. Your support is the amount of money that is used to pay all your living, education, medical, and travel expenses. The education expenses include the tuition, fees, etc. for your graduate degree.

If you do not have earned income totaling at least half of your own support, you may be subject to the Kiddie Tax. Scholarships and fellowships do not count as earned income for this purpose.

The support test being calculated this way creates a very high bar for funded graduate students as tuition can easily rival or exceed living expenses.

4) At least one of your parents was alive at the end of the year

If your parents (including adoptive and step-parents) are deceased, the Kiddie Tax does not apply to you.

5) You don’t file a joint return

If you are single, the Kiddie Tax may apply to you. If you are married filing jointly, the Kiddie Tax does not apply to you.

If you meet all five of these criteria, you need to fill out Form 8615, as the Kiddie Tax may apply to you.

How Is the Kiddie Tax Calculated?

Form 8615 calculates your Kiddie Tax. Part I calculates your net unearned income, and Part II calculates your tax.

You should carefully fill out each line and read the instructions to find the correct definitions. I have highlighted some points about each line specific to fellowship recipients, but you still need to read the full instructions.

Line 1

Line 1 asks for your “unearned income” as defined above. If you had no earned income (i.e., you were 100% on fellowship for the calendar year and had no other income sources), you can use the value from your Form 1040 Line 1. If you had both earned and unearned income, you need to fill out the Unearned Income Worksheet (p. 2 of the form instructions), which subtracts your earned income from your total income.

Line 2

If you took the standard deduction, enter $2,200. If you itemized your deductions on Schedule A, there is a different formula to use in the instructions.

Line 3

Line 3 = Line 1 – Line 2

If the value in Line 3 is 0 or negative, you do not have to pay the Kiddie Tax. (Translation: If you took the standard deduction and your unearned income is less than $2,100, you do not have to pay the Kiddie Tax.)

Line 4

Enter in Line 4 your taxable income from Form 1040 Line 11b (your gross income minus all relevant deductions).

Line 5

Enter in Line 5 the smaller of the values in Line 3 and Line 4.

Line 7

To calculate your tax, you have to use the Line 7 Tax Computation Worksheet on p. 4 of the instructions or the Tentative Tax Based on the Tax Rate of Your Parent Worksheet on p. 5. The first worksheet applies the tax rates for estates and trusts to your unearned income; it is likely more advantageous to you to elect to use the second worksheet, but you will need to know your parents’ and siblings’ incomes for the calculation.

How to Avoid the Kiddie Tax

Once a tax year ends, you run out of opportunities to avoid the Kiddie Tax. To avoid the Kiddie Tax in the current or a future tax year, make sure that at least one of the five above points on who the Kiddie Tax doesn’t apply to is true for you. For example, you could:

  1. Delay your matriculation into grad school
  2. Configure your income and expenses such that you pass the support test, e.g.,
    • Request that you are paid by an assistantship instead of a fellowship for part or all of the calendar year
    • Earn a significant side income
  3. Get married and file a joint return.
  4. Find every applicable qualified education expense to make more of your fellowship income tax-free (e.g., your student health insurance premium if paid by scholarship)

How to Minimize the Kiddie Tax

If you are subject to the Kiddie Tax, the best thing to do is minimize your unearned income and taxable income. If you have any influence with your parents and they are willing and able to minimize their taxable income, please ask them to do the same.

You can minimize your unearned (awarded) income by making as much of it tax-free as possible using your qualified education expenses. This is largely accomplished more or less automatically, but please be thorough in tracking down and documenting every possible qualified education expense, such as course-related expenses and certain fees. Box 1 of your Form 1098-T is likely not the full sum of your qualified education expenses for this purpose.

You can minimize your taxable income by taking additional above-the-line deductions or adjustments to income, such as contributing to a traditional IRA (through April 15 of the subsequent year) or paying student loan interest (during the tax year).

Remarks

The fact that fellowship income triggers the Kiddie Tax is unconscionable and potentially highly financially damaging to an already vulnerable population, graduate students funded by fellowship or awarded income. Despite their lack of earned income, these graduate students are typically financially independent from their parents, so their parents’ income, even if high, is immaterial to their lives. This aspect of our tax code desperately needs reform; however, I am not hopeful that it will be reformed in the near future as it has withstood two recent tax code updates.