In addition to my original post on Loan Forgiveness, last week I reviewed the Public Service Loan Forgiveness (PSLF) program.
I wanted to blow out one additional thought on the PSLF – but this really applies to all debt, any government program, and your ability to negotiate a higher salary for the rest of your life.
The value of flexibility
The human brain is really poorly equipped to understand opportunity cost. Opportunity cost – basically the idea that when you do “A”, you forgo the opportunity to also do “B”. For example, if you are a full time student, you forgo the opportunity to work for that year. It’s hard to compare/contrast the value of a degree and a year of formal education versus a year of income and experience. It’s REALLY hard to evaluate today’s opportunity value over the next 20, 30, 40 years. For example, if you saved $6,000 in that year and it earned 10% over the next 40 years it would be worth $322,000. Is that more or less valuable than a year of education?
One of the underrated problems of the Public Service Loan Forgiveness plan is that it lock’s you into one job. While it may seem amazing to have $75,000 of debt forgiven, if you really break it out that’s $840 a month or $10,000 a year (including interest). Is it possible through hard work and diligent looking to find a job or alternative stream of income where you can earn an additional $10k a year? Absolutely.
When you find an additional stream of income or develop a skill that serves the community in a way where they are willing to pay you for it, you own that. It transfers with you into new geographic or employment futures. It’s additional financial flexibility provides leverage in the type of jobs you choose to take.
This commitment to flexibility is why one financial guru dislikes home ownership. James Altucher is a secular, contrarian, pot-stirrer that tries to reshape our financial perspectives. Note the reason for his position against home ownership:
You’re trapped. Lets spell out very clearly why the myth of homeownership became religion in the United States. Its because corporations didn’t want their employees to have many job choices. So they encouraged them to own homes. So they can’t move away and get new jobs. Job salaries is a function of supply and demand. If you can’t move, then your supply of jobs is low. You can’t argue the reverse, since new adults are always competing with you. (source)
His point (among others in the article) is: the Opportunity Cost of homeownership is that the illiquidity of your house prohibits your ability to take a different job outside a very limited geographic area.
Think about that point in the context of the Public Service Loan Forgiveness plan. If your employer knows you have a large student debt burden does that give you more leverage in salary negotiations? Of course not – they know you need a job. Once you have the job, does it put downward pressure on your future income? Sure – they know you are locked in. If your employer knows you need 120 consecutive payments from a qualified 501c3 or you fall out of the PSLF, does that give them additional leverage?
Your employer shouldn’t have that leverage. Even if they know you could go earn $10k-$20k MORE in the non-501c3 market, if you’ve been in the PSLF for four, five, or six years they are pretty confident you won’t leave.
The first rule of negotiating: Whoever has the most ability to walk-away has the leverage.