Where you work can have an enormous impact on your student loan repayment strategy. Changing jobs can lead to changes in your income and your qualifying status for student loan forgiveness options. But what if you’re in a position that makes you unhappy?
Loan forgiveness is an excellent perk, and it can save you a significant amount of money when repaying your student loans. If your job is making you miserable, should you stay to continue to pursue student loan forgiveness? The choice depends on your income potential.
PSLF vs. taxable forgiveness for low-income earners
PSLF is only available to employees of government organizations or not-for-profit companies. Having your loans forgiven after ten years is a significant advantage of the program. However, if you’re unhappy with your work, ten years can feel like a long time.
One of our readers, an attorney pursuing PSLF, sent us a message to ask about changing jobs. She works for a non-profit organization and receives a salary in the mid $50,000 range. She’s feeling stagnant in her career and is wondering if PSLF is worth it, based on her feeling like she’s hit a plateau.
If you’re in a situation like this, consider the alternative. A job with benefits like a 401k match, paid time off, and health insurance is probably worth $20,000 to $30,000 more than what you might get in the private sector.
Going from the public sector to the private sector
The potential earnings of a career switch are important, too. You could jump from $50,000 a year to a six-figure income. Look at the total student debt you have and think about your plan if you get a higher-income job.
Remember that the worst-case scenario is that your federal student loans are a tax. For this attorney, if she took a higher-income job, she could still pursue taxable loan forgiveness. The worst that could happen is that her student loan payments would equal 20% of her income. But that is truly a worst-case scenario.
Let’s say this attorney received a job offer with a $100,000 salary. If you subtract 20% for income-driven repayment and saving for the tax bomb, she’s left with $80,000. Keep in mind that she must now make payments for 20 to 25 years because she loses access to PSLF.
But if it can reduce her stress and give her the opportunity for an increase in potential earnings? A career change can be worth it based on future career income growth.
The bottom line is that you shouldn’t feel trapped. If you keep your loans as federal loans, you can always switch back to the public sector and continue with PSLF if you don’t enjoy working in the private sector.
Moving from not-for-profit to private sector for high-income earners
Let’s say you’re a physician trying to decide whether to stay at a VA or not-for-profit hospital job. You’re thinking about making a switch to private practice or starting your own practice.
High-income earners can see a more significant gap in pay when comparing not-for-profit positions to those in the private sector. But it depends on your specialty because, for some, the trade-off might not be that different.
For instance, the difference in private practice and not-for-profit for a pediatrician might not be that significant. But a not-for-profit gastroenterologist or a private practice gastroenterologist could see double or triple their income.
When leaving PSLF isn’t that bad
I’ve never seen a case where PSLF is so good that leaving it would lead to disastrous consequences. If you hate your job and feel trapped, you have options.
If you have at least $200,000 in student loan debt, here’s what I would do:
- Subtract $100,000 from your total debt balance. For example, if you have $200,000 in debt and subtract $100,000, you’re left with $100,000.
- Take that total and divide it by the number of years you have left to get PSLF. If you have five years to go, $100,000 divided by 5 is $20,000 per year.
- Your “per year” number is the after-tax value of PSLF per year.
When comparing paying your loans back to using PSLF, you’re looking at a difference of about $20,000 a year. That means you only have to earn about $20,000 extra each year in the private sector to equal the benefits of PSLF in a public-sector job.
But there’s a second part to the equation. Because student loan payments are not tax deductible, you need to consider the taxes you’ll pay on the additional income you’ll earn. The rule of thumb is to increase the per year value of PSLF by 50%.
That’s how you get an estimate of what PSLF is worth in salary value. Here, you would need to earn $30,000 more in the private sector to make up for what you lose by not having PSLF forgiveness.
Should you stay in your job just for PSLF?
In general, PSLF is a valuable tool for people with little ability to increase their earnings. But if you have the potential to increase your pay, you don’t need to stay in a job that makes you unhappy just for PSLF.
The worst-case scenario is to pursue taxable forgiveness in the private sector. And if you’re not doing taxable forgiveness, that’s because it’s a much better deal for you to pay a flat monthly amount on your loans to pay them off completely.
If you’re on the fence, I encourage you to meet with one of our consultants. We’ll go over all of your repayment options under different scenarios to help you decide. If you’re struggling with the decision to stay with your job and are worried about how not having PSLF will affect your finances, book a consult today.