Financial Strategies for Grad Students

When I was in grad school, I faced near-constant financial problems. My income was barely adequate, and the variety of streams it came from meant that my access to the money I’d already earned was often delayed in unpredictable ways. My one advantage was a good credit rating. I had gotten my first credit card as an undergrad, and I used it sparingly and paid it in full nearly every month. After a semester abroad, I was carrying a balance, and I took out a small bank loan to pay it off. So I had drawn on a significant amount of credit and used it responsibly. I understand that not everyone starts from this point, so my strategies may be inapplicable.

My strategy for coping with the difficulties of financial management was based on three simple principles:

  1. Think short-term: Long-term questions like how I was going to pay everything off were moot. The important thing was how I was going to keep meeting my immediate obligations until the next influx of cash came.
  2. Favor liquidity: Given my access to credit, the only hard constraint was the availability of cash (meaning money in my checking account). If given a choice between going further into debt or making a cash payment that would quickly put me at risk of not being able to meet another cash obligation, I always chose going further into debt.
  3. Preserve the credit rating: This meant always paying every bill by whatever means necessary. If I missed a single payment, that could lead to a decline in my credit-worthiness, leading to higher minimum payments and a decline in liquidity that could further endanger my ability to meet my ongoing obligations.

To make this strategy work, I maintained at least three credit cards at all times. My intention was to have one credit card as my “rolling account,” which I would pay off every month. The other two gave me room to bounce money back and forth.

I absolutely refused to ever have a debit card for a variety of reasons. First, if the credit card company was willing to give me a free loan every month for my day-to-day purchases, why not take it? Second, if I did wind up carrying a balance, the consequences were likely to be less expensive than if I overdrew my checking account (fees and penalties were at their pre-crisis peak). Finally, if someone stole my debit card, that gave them access to my actual money — and even if I’d get that back, any serious disruption to my liquidity could have very negative consequences.

Oftentimes, I would not be able to pay the full amount of my “rolling account,” and so I would do a balance transfer. This actually helped my short-term liquidity because the balance transfer satisfied the need to pay that account on that particular month. I always timed my balance transfers to take advantage of the ability to “skip” a payment out of my checking account. Balance transfers do normally carry a fee, but the priority under the emergency circumstances of grad school is not to minimize your debt load, but to maintain your ability to keep rolling over your debt on favorable terms. Making sure to keep rolling over balance transfers with new offers does have the long-term benefit of minimizing your interest payments, but in the short term, it also reduces your minimum payment, hence helping the all-important liquidity. If your card has cash-back rewards, it helps to stockpile these so that you can get a free minimum payment out of it every once in a while.

Informal credit can be helpful, too. Periodically paying for group outings on your card and taking cash can reduce the need for ATM withdrawals for cash-only settings, maximizing the amount of money available in your checking account. Having a roommate with a more stable financial situation can also help if he’s willing to let you delay paying your portion of the rent until that next check comes in (thanks, Mike!). I always avoided taking direct loans from friends and family members, however, because I knew I would never actually pay it back, at least not within a reasonable amount of time. Between the stress of being indebted to an evil bank and the stress of letting my financial situation ruin an important personal relationship, I always went with the former. (Plus my family frankly had no money to give me anyway.)

For this system, it helps to be as anal-retentive as possible. I always paid my minimum payments for my credit cards within a day or two of receiving my statement, just to be safe. I set up as many other bills to charge my credit card automatically as possible. I also kept up the seemingly antiquated discipline of maintaining a written check register, which allowed me to keep better track of where funds had already been committed. People sometimes make fun of me for doing this, but one benefit is that I’ve literally never overdrawn my checking account at any point in my entire life. Given how badly the downward spiral of overdrawing your account can become, that’s huge.

Now that I’ve gotten a job, I’m on pace to pay off my credit card debt over a period equal to how long I was in grad school — meaning that it was essentially “income smoothing” on a very long timeframe. My student loans are excessive, but I can still pay them off within the normal 10-year period without living in abject poverty. And this has all been possible even though my salary at both places I’ve worked has been far below average. I could have worked more in order to take on less debt, but that would have significantly prolonged my time as a grad student — which likely would have hurt my long-term prospects even more than I already have. The amount of money you can make in a year, even for a visiting position, is always going to be more than the amount of debt you will allow yourself to go into.

Of course, all of this only worked out because I got a job. But if I had not, I was prepared to work outside of academia because I viewed adjunct teaching as an absolute rip-off that more often than not tends to hurt people’s long-term job prospects. All through grad school, I did a variety of freelance work in the corporate sector that paid much more, for much less work, than adjunct teaching ever could have. I’ve written about this before, though, so I won’t repeat myself here. Long story short: your overriding priority should be to finish, because that’s when you get the chance at a real meal ticket. I know people worry about their PhD going “stale,” and that’s a real issue — but locking yourself into a low-income trap indefinitely is most likely not the solution.

I don’t know how much my strategy is replicatable without my starting conditions, and I’m sure others have different strategies that may work better. Hence I open the floor to you, my dear readers.

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19 Responses to “Financial Strategies for Grad Students”

  1. Stephen Keating Says:

    First off, I’m thoroughly impressed by the way that you have been able to manage the complexity of juggling debt. However, I’m not sure most people could handle that level of financial maneuvering. Speaking from my own experience, I would argue that the most important advice for grad students is to learn how to set a budget and follow it. After just “winging it” for far too long, when I finally sat down and budgeted things out, I was shocked to learn how I was spending my money. I use mint.com, which is free and easy to use.
    On the revenue side, ACT/SAT tutoring is an easy, flexible side hustle that pays well.

  2. Adam Kotsko Says:

    Right, but no budget accounts for the fact that your computer could break down at any moment, etc., and I’m just going to come out and say that your income in grad school is bound to be inadequate if you’re a single person. If I hadn’t placed such a maniacal premium on finishing above all other priorities, I probably wouldn’t have had to be as aggressive — but people should realize that these strategies are available and not be moralistic or unrealistic about debt.

    The cost of not finishing has to be calculated in terms of the opportunity cost of not having a real job. If you take your probable salary even from a visiting full-time position and substract out the amount you’d need to let yourself go into debt to leave yourself enough time for focused work, it strikes me as very unlikely that your income from various side jobs (above all, adjuncting) is going to exceed the difference.

    Which is to say: the grad student is always, to some extent, in an impossible situation financially. By sharing this, I’m trying to give people to options they might not have realized existed.

  3. beatrice marovich Says:

    I just want to say that, although I know it’s not workable for many grad students, I don’t think adjuncting is always and in every case a total rip-off and waste of energy. I know that I’m still in grad school, so I’m not really one to go doling out advice about how to “get through” it. But I’ve been adjuncting 2-4 courses the entire time I’ve been in grad school and am still on track to finish the PhD in 5 years.

  4. Adam Kotsko Says:

    Right, I formed that judgment never having done any adjuncting — I didn’t intend for it to be a prescription for everyone. As with the credit card strategizing, I think too many grad students view it as a necessary default option and don’t even strongly consider other possible ways to make money that might be more effective for them.

    Talking with The Girlfriend just now, I’m also realizing that I seem to have an internal “budgeting” impulse and never have to deal with things like compulsive spending, etc., that get people into such trouble with credit cards. Perhaps having the hard limit is a better option if you really struggle with that — I don’t know.

  5. Robert Minto Says:

    This stuff is important. I was brought up to have a horror of credit cards, with the result that when I moved from college to become a grad student I had only ever used a debit card. Nearly fucked me over when I couldn’t get my apartment lease with a credit rating of 0. Even if you never have a problem with too little in the checking account, it’s still important to have credit. Like Adam said, if the credit card company will give you a free loan every month, and you can pay itback, why not take it? Even if you have no liquidity problems, building credit is worth it.

  6. jjp Says:

    What’s even better for your credit score is carrying a large line of credit and using as little of it as possible—and paying off the balance in full every billing cycle. Paying in full, however, makes you a bad credit card customer because then the bank doesn’t get to extract unholy levels of interest.

    The loan isn’t *free* by any means—banks don’t give out “free” loans. It’s only “free” in the sense that there’s an exceptionally low barrier to getting a credit card, and because of that the interest rate can be 10% to 20%. Compare that to 6.8% for a subsidized student loan.

    I don’t think grad school is worth being buried in credit card debit. You should only use the card for a large, unexpected expense (like a car repair, new computer, etc.) and then only if you can’t get another loan to cover that expense.

  7. Adam Kotsko Says:

    The loan is literally free to me if I pay it off every month. The first month is free, full stop. That can put me in a position where I’m exposed to higher interest rates, but then using my debit card can also put me in a position where I’m exposed to high fees. And even if I pay off my loan every single month, the bank is still taking a cut of all my purchases from the merchants — this is a little-noted fact. I’m sure it’s a rare credit card customer that they are literally taking a loss on. They would also make money if they charged only 6.8% interest. The reason they charge higher rates is because they can, not out of any inner necessity. In fact, I think that people’s moralistic fear of credit cards makes them more willing to accept the high rates, because they feel they somehow “deserve” to be punished if they let things get out of control.

    Part of this strategy is to be able to keep rolling over your debt on favorable terms. Balance transfer deals also often feature rates lower than the 6.8% figure — and if you aren’t seduced by a 0% rate, you can lock in the lower rate for a long time or even indefinitely (I once locked in a 3.9% rate for a significant portion of my debt that was good for the life of the loan). On net, I’m paying about the same rate of interest for my credit cards as for my student loans. Plus student loans are virtually inescapable — the probability of discharging credit card debt through bankruptcy is vastly higher than the near-infinitessimal chance of discharging student loan debt.

  8. Adam Kotsko Says:

    It’s really naive to think that a bank is ever taking a loss at any step of the transaction. They make money every time I use my account. Then they make even more money if I carry a balance. Then they make even more money if it gets out of control — and then they milk that until I go into bankruptcy, at which point I will almost certainly have paid off the initial balance many times over. They don’t “need” to charge high rates to “subsidize” responsible customers, nor do they need to destroy people’s lives to make up for the fact that they give cash-back rewards. They charge the high rates to make more money, on top of the money they’re making from the responsible customers.

    I want to emphasize that this holds even in the case of cash-back rewards — the bank is cutting you into the interchange fee to encourage you to use the card more. Why would they do something that encourages you to do it more if they were taking a loss on it? The only genuine loss-leader I can see is the occasional thing where you get 5% cash back on certain categories, but even in those cases, there’s a set cap. Surely the strategy there is to make you feel like you’re getting more than you’re really getting, so that you’ll choose their card as your primary one — hence giving them a wider range of charges to take a cut from, even before they’ve charged you a penny of interest.

    The merchant is effectively paying that first month’s interest for you, and they do so because they believe they’ll make more money on volume by allowing people to pay with credit cards (plus they have to handle less cash, plus they always get their money even if the charge is fraudulent, etc., etc.). In short, this would be an economically beneficial system for all parties even if every single credit card customer paid their balance every single month. The usury is just gravy.

  9. Adam Kotsko Says:

    (Sorry, this is one of my pet topics. If anyone remotely brings it up, I go on a rant.)

  10. Christopher Rodkey Says:

    Someday I’ll write something about this as it pertains to ministry–few (if any) seminaries explain to their seminarians how to make enough to pay off student debt, etc., etc.

    On adjuncting: In graduate school I would only adjunct if the course was for the school where I was enrolled (I taught two seminary courses for Drew while finishing the Ph.D.) or if I could eventually get in to a pension program through the school. New Jersey offered this through most of their community colleges and state universities. The prospect of eventually earning an additional small pension, or retiring much earlier than usual if I took a state university position was a good enough fringe benefit for me to keep doing it. In New Jersey and Illinois, where I adjuncted, most community colleges offer a pension plan through the state; in Pennsylvania and in other states they do not.

    The other thing is that I paid a minimum amount of money on my student loans while I was still in school, $50 or $100 per month. I paid off one loan while still in school without noticing it too much, and this was good for credit.

  11. jjpulizzi Says:

    Adam, I'm not arguing that debt is immoral. Indeed, every major economy relies on debt to function, even as far back as King Edward III taking loans to finance the 100 Years War and then defaulting on some of them (which caused a minor financial crisis among early Italian banks).

    I'm also not claiming that banks don't make any money on credit card customers who pay their balances in full every month. I'm familiar with the interchange fees that banks charge each other for processing (credit or debit) card transactions and would not assume banks would issue credit cards if they couldn't make money on them. Nowhere in my brief comment did I imply the bank/card issuer lost money on my account b/c I paid the balance in full. I'm a bad customer b/c they don't earn interest from a carried balance, so perhaps I should simply have written that I'm not as desirable a customer as people who do carry a balance.

    Yes, I suppose you can think of the loan as free if you pay it off every month, but that's not what you recommend doing in the above post. If you pay the balance every billing cycle, then you're effectively using the credit card the way you should use a debit card—i.e., not spending more money than you have available in the account. To reiterate, I'm not making a moral judgment about people spending more money than they have. As far as I'm concerned our economy encourages and even relies on people doing exactly that—though some people will no doubt think that taking out a mortgage or car loan is somehow more acceptable than accumulating credit card debit or overdraft fees. I'd only say the former are better deals (you get a house or a car) than the latter.

    I take your point that a credit card allows for more flexibility because it lets you keep more money in your bank account while still paying other bills/expenses. However, I think a credit card should be a loan of last resort, because of the interest rates you'll incur if you carry a balance from one cycle to the next. Those rates are high not just because the banks can "get away" with charging them, but because there's a much higher likelihood the borrow (i.e., card holder) will default on the loan (i.e., not pay the full balance) than for a more traditional loan, which takes into account your credit score, income, and other collateral. They need the higher rate partly to ensure they'll get back as much of the principle as possible in the likely scenario you don't ever pay the full balance. Otherwise it makes no business sense to offer credit cards.

    The only other advantage (besides the flexibility) that I can see to credit card debit over student loans is fact that declaring bankruptcy will clear the former but not the latter—as you mention in the first reply. Of course, then your credit score (which you advise keeping high in the initial post) is screwed for the next 7 years.

  12. Adam Kotsko Says:

    My tips are for the limited period of grad school, when it is likely that almost everyone will engage in some “deficit spending.” I am not encouraging people to indefinitely increase their credit card debt for their entire lives. If you’ll note, I said that my goal was for one of my cards to be paid off every month, and most months, that actually occurred. You seem to have strong views on the undesirability of credit card use and debt in general — I don’t share those views, but I see why people think that way. I also didn’t mean to impute ignorance to you. As I said in my parenthetical comment, I have a tendency to go on rants on this subject, on the slightest pretext.

  13. Sunday Night Links! | Gerry Canavan Says:

    […] Financial Strategies for Grad Students. As harrowing a “Just Don’t Go” screed as any I’ve come […]

  14. Diana Christine Hereld Says:

    At the moment, I’m faced with this decision:

    A) Accept my place in my top-choice grad program in the UK with no funding, or
    B) Begin seriously looking at decent programs in the US that would take a bit longer to complete, but could potentially be fully-funded for me.

    Do you have any thoughts on this? Obviously there are several variables, but would you stick to the guns of saying it’s more important to finish and join the work force (and I don’t mean teaching piano lessons) than attend your top choice school with the faster turnaround?

  15. Adam Kotsko Says:

    I think you should try to find a funded offer, whether in the US or UK. A degree from a US institution could help your job prospects because it will require a broader range of training — not just the dissertation, but coursework, exams, probably some form of teaching assistantship, etc. — and that gives search committees a wider range of things to latch onto.

    My thinking in terms of emphasizing finishing was not minimizing the length of the program from the start, but rather not letting yourself get bogged down in an infinite ABD limbo.

  16. Noah Snyder Says:

    I’m a bit confused about what you’re saying about the financial comparison between adjunct teaching and “civilian work.” Doesn’t teaching mean you don’t pay tuition and fees, and so you actually need to make quite a lot more (roughly double) in civilian work to break even?

  17. Adam Kotsko Says:

    That is often how a TA-ship at one’s own institution is structured. I was thinking of taking on additional teaching work, either at another institution or beyond the teaching associated with a funded assistantship.

  18. filipegracio Says:

    Hello,

    I just thought I’d share some thoughts from a european with a PhD. In reverse order:

    Point 3 (credit rating)
    The system in europe is far less predicated on going into debt, because of the obvious massive difference of the price of education. Also, for whatever reason, “credit cards” are far less common. It’s much more usual to get a loan and a debit card. The concept of credit-rating exists but its far less applicable. It’s much more of a thing for those who want to buy a house or a car. Not to pay basic bills. Therefore juggling credit cards is something almost no student ever does. But from what I know of the american system (I was a visiting student there), this makes sense.

    Point 2 (favour liquidity) sounds like a good advice. Indeed it’s very important not to incur penalties and fees, and never leave anything unpaid.

    Pont 1 (short term) is understandable when it comes to not worrying and stressing out, prioritizing the meeting of obligations, etc.. but I don’t think it’s generally good advice. If you just mean ‘pay what you owe at the moment, and worry about the rest latter’, then of course. But it’s worth thinking about if your strategies are leading up to a better situation or are they *just* allowing you to keep your head above water. I’d say “One thing at a time”, and not “think short term”

    yours, Filipe.

  19. Alex Says:

    “Concentrate on anything that maximises your discretionary control of payments”?


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