Reader Mail: Going to Grad School and Being Responsible
I’m a recent college graduate and have been working as a government contractor for the past two years. I have saved about $15,000, which I have mentally divided into thirds: travel/fun money, emergency money, and long-term savings money. I have about $4,000 in Stafford Loan debt leftover from college and no consumer debt.
Next month I’m starting graduate school and will be living on a fellowship of $30,000/year for the next 5-6 years. I have a budget planned and intend to save $500/month while in school. My question is: What should I do with the money I have already saved? Should I pay off my student loan debt? Open a high-yield savings account? Start a Roth IRA, even though I wouldn’t be able to contribute to it during school? Also, should I continue paying off my student loan debt while in graduate school, or defer until I (hopefully) earn a higher salary? Any other advice for living responsibly on $30K until I’m 30 would be appreciated. — E.J.
I have a sneaking suspicion that a recent college graduate who has $15,000 saved up—and knows a thing or two about Roth IRAs—already has a pretty good handle on his or her finances. Depending on where you went to college, most students graduate with more debt than they have in savings, so, well done.
Let’s go through your questions one at a time. Should you pay off your $4,000 Stafford loan? I would. You’d still have $11,000 in savings, and you’d also be debt-free. A lot of people dream about a day when they won’t have to make another payment to a loan company, and for you, that day could be today. As someone with no consumer debt, it sounds like you’re the sort of person who doesn’t like to owe anyone anything. Pay off that loan, and make that leap. You’d save more on interest payments than you would gain by putting that money in a high-yield savings account.
Should you open a high-yield savings account? Yes! I don’t know where you’re keeping that $15,000 now, but if it’s in a checking or savings account at a big bank you’re probably not earning any interest on it. It shouldn’t cost anything to open a high-yield savings account, as long as you’re opening it at the right bank. I’ve suggested Ally before, but if you look at Bankrate.com, it looks like Barclays is currently offering a respectable 1 percent APY, with interest compounded daily, and no monthly fees or minimum balance required.
Should you open a Roth IRA, even if you wouldn’t be able to contribute to it during school? Yes, totally! If you’ve earned income this year, and are eligible to open and contribute to a Roth IRA, you should open one and contribute the max. Here’s why:
• Even if you’re not contributing to your Roth IRA account while you’re in school, your initial contribution will benefit because of compound interest.
• You’re allowed to withdraw any amount of money you put into your Roth account at any time without having to pay a penalty. So if you put $5,000 from your savings into the Roth account, and decide you need that $5,000 later, you’re totally allowed to withdraw and use that money. You only have to pay a penalty if you withdraw any interest that your account has earned.
• Open an account now, because after it’s been open for five years, you can withdraw up to $10,000, including earnings, to buy your first home (if you’re the sort of person who wants to own a home some day).
Also, do you know for sure that you won’t be able to make any contributions to your Roth account while you’re in grad school (I’m guessing you think this because you technically won’t be “earning” income)? Check with your financial aid office to see if your fellowship grant will be reported on a W-2 form, because if it is, it may be considered earned income by the IRS, and you may be eligible to make Roth contributions.
As for advice for living responsibly, you’re already planning on socking away 20 percent of your fellowship money—you’re pretty much there! Keep at it, and have fun in your graduate program. Go to happy hour with your study group. Have dinner parties. And if one of your professors asks you to come to her house to help her bake a turkey for Thanksgiving, do it. You’ll have a hilarious story to tell later.
Photo: Flickr/Alamosbasement
I don’t know about paying off the loan now–grad school means you can defer the loan without accruing interest (right? I assume a Stafford Loan will defer interest as well as payment), and inflation means that $4000 will be worth less in 5-6 years than it would now. I don’t see why you wouldn’t take the interest-free time to let your debt become less significant, even if just by a small percentage.
ETA: if deferring the loan doesn’t also defer interest, ignore the above.
Normally I advise people not to pay off student loans as a matter of priority, but a lot of factors about your situation have made me reconsider in this case.
I was going to point out that not paying the loan off is often actually the more conservative option, because if something catastrophic happens, you can’t get that $4,000 back. But since you will be in grad school, you *could* actually borrow (a significant amount) more money if you really needed to, at the same or lower interest rate. This, plus the extent of your existing savings, suggests that paying off to avoid the interest is the right thing to do.
I would follow the above suggestion if you can get an interest-free deferment, though.
@stuffisthings (Haha I’m talking like somebody who is not fucking terrible at managing his own money.)
Roth IRA for sure! If you’re 25 and you fully fund (i.e., contribute $5K) a Roth IRA this year and never contribute to it again, not that I’m advocating for THAT, it’ll still almost certainly be worth over $108K by the time you’re 65.
I would pay off the loans — and am infinitely jealous that I am not in a position to do so with my own. I salivate at the prospect of sending my final check to Sallie Mae and telling them where to stick it. To be clear, I don’t resent them for loaning me the money, but for incorrectly putting my loan into repayment status and thus improperly capitalizing my interest multiple times, as well as their reps steadfastly refusing to look at my clearinghouse enrollment status to verify that I am, in fact, still in school until after they have capitalized said interest.
Side note: I accepted my advisor’s invitation to a brunch party at her house, and offered to come over early to help set up. She assigned me the task of making a layered egg dish that I promptly rechristened “Erik Egg-strata” and with which I managed to start a fire in her oven. She still invited me to transfer with her when she took a job at another school, and it is indeed a hilarious story that I tell at every opportunity.
I’ve been wanting to open one since I started reading this site but – I don’t get W-2s. Though I’m a US citizen, I live in Japan, and some of my income is in yen. I earn a little in dollars from freelance assignments, but I don’t receive W-2s – at best I get some freelance/contractor forms, what are they called, 1092s? I have some money socked away in a savings account that is not doing much (BofA sux). So can I not transfer it into that Roth IRA?
Where are you going to grad school that your stipend is $30,000? That is like an actual middle-class wage! The stipends I know of (including my own) are two-thirds to half of that.
@mirror_father_mirror Many engineering/science stipends for universities in cities are on the order of $30,000; some start lower, and end up that high once you’ve passed qualifying exams
@mirror_father_mirror Hahaha that was my first thought. Mine is actually less than a third of that. (Granted, I live in the South, in a small city. So it’s livable. But still.)