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How Side Hustles May Negatively Affect Student Loan Borrowers

Robert DowdAugust 24, 2020

Financial Planning

Second jobs and side hustles are very different, yet some may mistake one for the other. Second jobs are stricter than side hustles, but still offer the same result of additional cash flow. Individuals are typically working for an employer, considered part-time and have a set wage and hours per week. They are great in earning an additional few hundred dollars a month, but they are not side hustles.

People start side hustles when they want to pursue their passion, start their own business, or become financially independent at a more rapid pace. The term side hustle means exactly what it entails, someone working outside the normal ‘9 to 5’ schedule to invest their time and energy in something that they love to do and provide additional financial stability.

I am all for someone achieving their goals and wanting to pursue their definition of ‘happiness’, and there are very few negatives that come to mind when discussing side hustles. One negative would be relevant for anyone that has federal student loans and currently enrolled in an income-driven repayment (IDR) plan. Go figure, the one thing that already causes stress and anxiety for many borrowers would negatively impact their student loans when starting a side hustle.

When someone is in an IDR plan, their monthly payment is based off 10% – 15% of their adjusted gross income (AGI). Typically, someone goes onto an IDR plan because the standard monthly payment on their student loans is unaffordable, and/or they are in a position to receive Public Service Loan Forgiveness (PSLF) because of their job position, such as teachers, physicians, and nurses. The main goal for an individual enrolled in PSLF is to pay a little as possible over the 120 cumulative payments. Side hustles increase total income, which results in a higher IDR monthly payment.

For example, let’s say a teacher, who works for a public school district, is making $50,000 and has $70,000 in federal student loans at a 6.5% interest rate. If she were to pay the standard 10-year payment plan, her monthly payment would be around $795 per month, which would equate to around $95,000 over the life of the loan (10-years). If she enrolls in an IDR plan, her monthly payment would be around $260 per month, and the total loan expense would be around $38,000 if she received a 3% raise each year.

If that same teacher were to have a side hustle that brought in $5,000 in the first year and increased by 10% each year thereafter, her monthly payment would increase to around $300, and the total loan expense would be approximately $46,000. There is still a significant savings compared to the standard 10-year payment plan (around 52% savings), which would make anyone smile.

With proper planning, she could increase her 403(b) contributions, contribute towards an IRA, or do additional business planning to help lower her AGI and pay as little as possible towards her student loans.

If you have any questions or would like to discuss this further – please reach out to your HFA advisor at 610-651-2777.

 

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