Editors' pick: Originally published June 8.
Graduate school debt is one of the lesser-known areas driving the student loan crisis. Grad students comprise about 14% of the nation's college and university matriculants but account for about 40% of all student debt. Democratic nominee Hillary Clinton's New College Compact, unveiled last summer, focuses mainly on the cost of undergraduate education.
A big chunk of grad student income is routinely diverted to pay off these loans, leaving little—if anything—for retirement. Now new legislation could provide an end run around this immovable object and a path toward retirement savings.
The Graduate Student Savings Act of 2016, introduced by Sen. Elizabeth Warren (D-Mass.) and Sen. Mike Lee (R-Utah) would allow funds from a graduate student's stipend or fellowship to be deposited into an Individual Retirement Account (IRA). Under current tax laws, graduate fellowships and stipends are treated as income by federal and state governments. Since they don't qualify as compensation, funds from these sources can't be deposited in an IRA.
"We should be encouraging young adults to start saving early for retirement, but that's a lot tougher than it should be for graduate students who can't tuck away some of their income into tax-deferred accounts," Warren said. "This bipartisan bill will open an important opportunity for graduate students and postdoctoral fellows who want to start building their retirement savings."
The two-page bill amends section 219(f) of the Regan-era Internal Revenue Service Code of 1986. What it does not include is any mechanism to increase the dollar amount of fellowships or stipends. Carving out money for retirement from a fellowship or stipend might be a difficult trick to pull.
Most PhDs get at least some of their graduate school financing from fellowships or grants; and about a third report that fellowships or grants were their primary source of funding. The median doctoral student takes about seven years to finish a degree, a period that would be lost as far as retirement contributions are concerned. The Warren-Lee bill would at least provide an opportunity to save and let grad students and post doctoral fellows begin right away as opposed to years or decades after they get their degrees.
Not surprisingly, fund managers (Fidelity Investments, the Teachers Insurance and Annuity Association) and unions (the Service Employees International and the UAW) are behind the bill.
"Many graduate students receive stipend or fellowship support that helps them pay for food, rent, transportation, or other living expenses while in school," said John Sweeney, executive vice president of Fidelity Investments retirement and investing strategies. "Although this compensation is taxed as regular income, they do not have the option to save it in an IRA. All Americans should have access to tools that can help them save for retirement. People are living longer yet often have fewer sources of lifetime income, so the earlier they can place some money in an IRA, the bigger the impact down the road."
"Graduate and professional students work long hours, juggling their coursework and studies, oftentimes with teaching or research," said Kristofferson Culmer, president of the National Association of Graduate-Professional Students (NAGPS). He noted that these fellowships and stipends are analogous to a salary and should not be restricted to prevent people from saving for retirement and investing in their future.