What do you do when the CEO of your company pulls you aside and says “You’re not getting paid enough, we want to give you a raise, how much do you want?” Holy shit balls! Is this for real? Am I being pranked? This has got to be a trick question, right?
This exact scenario happened to a friend of mine earlier this week. He called me right after asking for advice, “Dude, how much should I ask for? I don’t want to come off sounding greedy?”
“Well,” I said, “what are your personal financial goals for the next three to five years? Do you want to start putting away extra money for your kids, pay off your student loans faster, max out your 401k?” We threw around some ideas and after a few minutes, he said, “What I really want is to get my MBA. I’ve been thinking about it for a while, and I am even willing to pay for it myself because the long-term income opportunities into the $200-$300k salary range seem worth it. Everyone asks me if I regret my student loans from undergrad, and every time I say ‘hell no!’ I owe all of my success to my education.”
As soon as he said that, we had a eureka moment! How much money would he need to make to pay for grad school himself vs asking his company to pay for the tuition?
Scenario 1: A $20k salary increase and pay for grad school out of pocket via a 10-year loan
In the first scenario, we decided that a $20,000 a year salary increase would be achievable, given the competitive job market and average salaries for similar work to what my friend currently does. We assumed grad school would cost about $52,000 total over two years and the rate on student loans would be around7% over a 10 year period. Once he graduated his monthly payments would be $603.76 and total $72,451.69. The total interest paid on the loan would be $20,451.69.
But wait a minute! That’s how much he would have to pay, not how much income he would have to generate to pay off the loan. Once we consider taxes, the price tag jumps up even further. He will be able to write off the $20,451.69 interest expense of the loan on his income taxes, but he will still be taxed on the principal of the loan. Assuming a 25% tax bracket he will have to generate an additional $17,333 in pre-tax income! So the actual cost of his $52,000 MBA would really be $89,785 if paid off over 10 years!
Would an extra $20,000 years to his current salary really be worth it? Over 10 years he would make an extra $200,000 but at least $50,000 would go to federal taxes, leaving him with only $150,00. Once you subtract the $89,785 tuition cost, he would be left with only $60,000 of additional income over the decade, an average income boost of only $6,000 per year!
Scenario 2: Ask for company tuition reimbursement
In the second scenario, my friend would ask to decline a salary increase in lieu of tuition reimbursement. My friend will have to pay taxes on $41,500 of the $52,000 tuition since any employee tuition reimbursement over $5,250 per year is taxable. So he will pay about $5,187.5 a year in taxes for a total of $10,375 in taxes over the two years.
After running through the financials it makes more sense for him to decline the salary increase and ask for tuition reimbursement instead. Apart from the numbers, he is more likely to gain favor and more respect from his CEO and upper management, because asking for a huge pay increase is quite greedy. They will recognize he is looking to better himself for the long run, and is looking to provide additional value to the company upon completion of his MBA. Once he completes his MBA, they will most likely offer him a promotion and more money, anyways. Lastly, he will become more marketable in California’s highly competitive job market.
Readers, what are your thoughts? Would you be willing to forego a $20,000 a year pay increase for long term gains?