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, 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