Grad School Finance

Adam Kotsko shares his approach to managing cash flow and credit cards -- and preserving one's credit rating.

August 9, 2013
 

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 for many people.

My goal was to keep my spending within the limits of my income and subsidized student loans. Like most grad students, I maintained a pretty austere lifestyle, but nonetheless there were times when I was forced to engage in deficit spending. My strategy for coping with the difficulties of financial management during these periods 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. Most of the time, this actually happened. 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.

At times, 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 for 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.

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 hugely important.

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 time frame. 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. So I think that this strategy, though stressful and far from ideal, has turned out basically successfully for me.

I can anticipate two objections. The first comes from people's justifiable fear of credit cards. Being overwhelmed with credit card debts seems to many people like the worst possible financial outcome, and so they might suggest that I should have relied more on student loans. I believe this would not have been desirable for two reasons, one short-term and one long-term.

First, student loans take time — you need to request the disbursement, wait for the institution to cut a check, go deposit it.... Credit cards are much more flexible and instantaneous. To me, it was meaningful to get the problem definitively solved right now rather than spending a few days worrying about when the check would be available. Second, in the worst-case scenario, credit card debt is dischargeable through bankruptcy. One does have to balance that against the interest rates for each type of debt, but my credit rating gave me access to very favorable rates through balance transfers, so that both my student loans and my long-term credit card debt carry similar rates overall. For me, then, the choice between taking on further (unsubsidized) student loan debt and further credit card debt was obvious.

The second is that I simply should have worked more to avoid going into debt. To some extent, I concede that this is true. Most of my periods of unemployment were involuntary, however, and in any case, there can be a trade-off between avoiding debt and finishing more quickly. The cost of grad school is not just the direct cost, but the opportunity cost of going without a full-time salary. Every year that you go without finishing is a year that you've foregone potentially tens of thousands of dollars, even for a visiting position. In that context, taking on a job that might significantly slow your progress, all to avoid a few thousand dollars of debt, seems very shortsighted.

Obviously not everyone winds up with a full-time position, and an extended job search can sometimes result in a Ph.D. going "stale." Locking yourself into a low-income trap indefinitely in the hopes of somehow gaming the system and choosing just the right time to go on the job market seems like a bad strategy, however— you're taking on a huge, known risk (hurting your long-term income prospects) for a vague and uncertain reward. Hence I conclude that the overriding priority, all things being equal, should be to finish, because that is your best chance of finding a real full-time job.

And if you don't find a job? Then that pushes forward the day that you can definitively give up and seek work outside of academe. I personally laid the groundwork for this in grad school, because I viewed adjunct teaching (rightly or wrongly) as a form of exploitation 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. Much of that work could be done from home, making it even more time-efficient. And in the meantime, I was building a parallel “civilian” resume, which did result in a concrete opportunity during a time when I wasn't sure what would come after the end of my first visiting position.

That kind of work isn't going to be right for everyone, and for some people adjuncting is preferable and beneficial. But every grad student has skills that are valuable outside of academe. You have research skills. You have writing skills. You are basically an information processing machine. You hopefully have some language skills. Depending on your discipline, you might also have some advanced math or stats skills — in any case, you probably know how to use standard office software better than the average office worker does. You’re almost certainly a stickler when it comes to grammar and usage. These are things that don’t take any special training or certification, and there are plenty of companies that need help with all of them. (And if you do have pre-existing specialized skills like programming or web design, then that’s just another advantage.)

In short, contemporary academe puts even the most fortunate grad students and young job-seekers in an impossible financial situation. We shouldn't make it worse by adding further constraints due to our prejudices about credit card debt or our false belief that our academic calling makes us unemployable anywhere else.

Bio

Adam Kotsko is assistant professor of humanities at Shimer College.

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