Figuring out when and if leaving job is financially feasible
February 15, 2016 12:02 PM   Subscribe

I work in a public interest/government professional job, which has big advantages for my student loan situation, but may not want to stay forever. I'm also in a field where going into private practice is common. Mathematically, how do I figure out at what projected income level going into private practice would be a financially sound decision? Also interested in any strategies I haven't considered.

My goal here is to figure out what amount of income I would need from self employment for this to be feasible--my very important next step, figuring out whether that income level is a reasonable goal career wise, is beyond the scope of this question.

Current financial situation:

--I make about $50,000 yearly. Good benefits. Raises are not big at this job over the years since it's an underfunded profession.
--About $125,000 in student loans from professional school (ack) with about 8% interest.
--I have $50,000 in savings and about $8,000 in a Roth IRA
--I am in the Pay As You Earn (PAYE) program, which means my loan payments are capped at 10% of income.
--Because I am in public service work, after 10 years of loan payments (I'm 1.5 years in), I can have my loans forgiven through the Public Interest Loan Forgiveness program (PSLF).
--If I go into private practice, I will lose PSLF, though I could still do PAYE if my income qualifies.
--My graduate school has loan repayment assistance for alumni doing public service work. That means that they are actually paying 100% of my monthly student loan bill right now, and will continue to do so as long as I stay in PAYE and remain in a qualifying public interest job. Meaning that if I do the ten years at my current job, I will basically have gone to grad school for free.
--Single, 31, no kids, no interest in having kids, little interest in becoming not single

So obviously, there are some huge advantages to my current setup. Mentally, however, it's hard to feel like I'm chained to my current job for 10 years. (There's no other public interest work I would prefer; I'm in the field I wanted to go into.) And I think about maybe wanting to become self-employed, for the same reasons I suppose anyone would: Greater autonomy and flexibility.(And hesitant for the same reasons anyone would: Lack of stability, maybe falling on my face.)

Also relevant: I have a "side career" in the arts that I wish I could devote more time to. That's the biggest reason for wishing I could be more in charge of myself. When I was in school, I was working just as much or more, but due to the flexibility of my schedule I could do a lot more of this side career. When your core hours are 8:00-5:00 it's harder to take advantage of other opportunities.

So my question is: Can you help me do the math? What numbers would I need to see for self-employment to not be a total train wreck if I decide to do it at some point? Anyone have personal experience with this?
posted by picardythird to Work & Money (11 answers total) 3 users marked this as a favorite
I'm in the same boat and I will ride out my loan forgiveness because it's taking the place of 401k benefits my job does not offer. Also, the income-based repayment means I'm making literally no dent in the principal balance of my loans (my payment, in fact, does not even cover my annual interest, so technically, I am losing ground on my loans and if I forgo forgiveness, I will have basically just accrued additional debt). Basically, you need to figure out how much your payment will go up when your income does; you need to figure out how much (if any) you are reducing your principal balance while in pay-as-you-earn; and determine how much loan you will have forgiven at 10 years versus how much principal you will pay off, once you give up forgiveness. You also need to know how much money you will have saved toward retirement when your loan is forgiven or when you switch careers. For me, there is no scenario in which giving up forgiveness makes financial sense, other than winning Power Ball.

However, your ten years of qualifying payments don't have to be while you are employed by a single (or the same) qualifying employer and they don't have to be consecutive. So you could certainly move jobs or even in and out of qualifying employment. I believe you cannot ever be in arrears or forebearance, however.

Ask Heather Jarvis is a pretty good resource for this, as will be the student financial aid office at your alma mater. Generally, though, good resources are hard to find, in part because no-one has reached loan forgiveness yet (only payments made after 2007 count, so it's next year before ANYONE qualifies for forgiveness). I know I've been told both that I don't need to file my PSLF employment certification form every year and that I do (both pieces of advice came from the federal student loan office).
posted by LeeloDallasMultiSocks at 12:24 PM on February 15, 2016 [1 favorite]

This is a simplistic way to look at it, but -- you could look at your average income over the next ten years in this job, like so:
- each year your employer is paying you $50k (direct compensation)
- each year your grad school is paying you $5k (loan repayment)
- at the end of your tenth year, PSLF will pay you $75k (loan forgiveness)

In this scenario, your 10-year earnings are $625k, so your average yearly earnings over that time are $62,500 per year. That is, of course, without factoring in any additional income you could make by slowly growing your side business, or any raises you might get through yearly reviews, being promoted, etc.

So, one approach could be: what can you do that would make you at least $62,500/year?

Another approach could be: what gives you the best chance of making your side business grow into something successful?
- to jump in with the savings that you have and give it all you've got for about a year?
- to try to grow it gradually over time, working around your day job, until it's netting you at least $62,500/year?
- to see if there are other options available at your job or a similar job -- maybe you can work half or 3/4 time while you're building your side business?
- to look for a job that gives you better networking prospects for the side business, or to use your current job to build your network for the side business?

I don't know the right answer -- it really depends on your specific circumstances, how well you like your current job, what your safety net is like, what the growth potential is on your side business, etc.
posted by ourobouros at 12:35 PM on February 15, 2016 [2 favorites]

Keep in mind it's not just salary and student loan repayment you need to consider, but health insurance, payroll taxes and any taxes/fees for any incorporating of your own company you'd do. Like if you want to make 60k per year, you need to pull in 150k or you make 1/ 3 as much as you bill per hour (you're not billing every hour worked in my first math there). This is a very rough estimate. You should see an accountant and/or lawyer!
posted by Kalmya at 1:13 PM on February 15, 2016 [1 favorite]

I believe there are PSLF consequences to second jobs (but not passive income--like rental properties) but I can't find anything at the government website. I know you can combine part-time work for two-qualifying employers to meet the "full time employment by a qualifying employer" requirement, but I think you run into problems if you are also employed by a non-qualifying employer.
posted by crush-onastick at 1:31 PM on February 15, 2016 [1 favorite]

oruobouros' calculations ignore taxes and interest. 8% of $125000 is $10000. At your current payment of $5000/yr, you are losing ground. If you quit this job, and want to pay off the loan in the same 8 1/2 years, you'd need to make payments of about $20000 a year. Allowing for taxes, you'd need to make around $80000 to $85000 a year to break even with what you're making now.
posted by mr vino at 1:37 PM on February 15, 2016 [4 favorites]

In this scenario, your 10-year earnings are $625k, so your average yearly earnings over that time are $62,500 per year... So, one approach could be: what can you do that would make you at least $62,500/year?

It's not $62,500 a year. You are not going to bill out every available hour when you are self-employed. You also have overheads when you are self-employed, from marketing to health insurance to your own retirement funding to totally unpaid vacations. Ask varies in opinions on this but you're probably looking at an income requirement of $90 - 120K to meet this at the same standard of living.
posted by DarlingBri at 1:38 PM on February 15, 2016 [2 favorites]

To clarify: once you don't have the loan forgiveness happening, if you continue to pay only 10% of your income, and make less than $100000 a year, you'll never pay off the loan.
posted by mr vino at 1:39 PM on February 15, 2016 [2 favorites]

All loans eligible for income-driven repayment (and thus, all loans eligible for PSLF in 10 years) are forgiven at 20 years, assuming the payments are made under a qualifying income-driven repayment plan and the loan is not in default.

So, these loans will be forgiven in any event, assuming (1) the program is not gutted or discontinued by Congress; (2) the Asker remains in an income-driven repayment plan; (3) the Asker does not allow the loans to fall into default. The calculus hinges on the difference between forgiveness at 10 years for public service or 20 years for income-driven repayment and the question of whether she will move to an income that disqualifies her for income-driven repayment.
posted by crush-onastick at 1:44 PM on February 15, 2016

"All loans eligible for income-driven repayment (and thus, all loans eligible for PSLF in 10 years)" should read "All loans eligible for income-driven repayment (and thus, ANY loan eligible for PSLF in 10 years)"
posted by crush-onastick at 1:52 PM on February 15, 2016

Don't forget to calculate the tax bomb. Loan forgiveness under PSLF is not taxable. Loan forgiveness on the 20-year program counts as taxable income, which means that in the 20th year, you'll owe income tax at your marginal tax rate on the forgiven balance. Make sure both that you're taking that into account in your financial calculations of what your job is worth, and also that if you do decide to leave your PSLF-eligible job and rely on forgiveness after 20 years, that you're setting aside savings sufficient to pay those taxes when your loans are forgiven.
posted by decathecting at 1:55 PM on February 15, 2016 [3 favorites]

8-5 leaves plenty of time for developing a side gig if your commute is short enough. Can you move closer to work?

Getting those loans paid off before you go out on your own... Priceless. Really. I've tried the solo entrepreneur thing and unless you're super well suited for it, the elements of risk and uncertainty can be very stressful. Doing it with a huge loan hanging over your head sounds like a recipe for disaster.

Also check out the cost of ACA insurance in your state. I bet it's more than you think out it is. On your own, there's also no such thing as paid vacation or paid sick leave.

I'm not sure how old you are, but ten years can fly by. If you basically like your job and colleagues, I wouldn't even think about budging unless you have a clear reasonable shot at 90k+ AND an appetite for risk/adrenaline.
posted by Salamandrous at 10:57 AM on February 17, 2016

« Older What's it like to work in fundraising?   |   Which lightweight tripod should I buy? Newer »
This thread is closed to new comments.