Student loan debt is getting out of control in this country. According to the Federal Reserve, there is currently $1.2 trillion in student loan debt in the US. Instead of putting all the blame on the cost of tuition as is currently being done by both parties in the presidential debate, we need more conversation regarding the shared responsibility the borrower has when they take out student loans. While tuition is one part of the equation (and one that certainly should be addressed), borrowing for cost of living expenses can be just as much of a factor.
When you are borrowing money, you should know and respect the power of compounding interest. Compounding growth can be your best friend when saving and investing. On the other hand, compounding interest can be your worst enemy when trying to get out of debt. This is especially true with graduate student loans that are often at a high interest rate and are unsubsidized, meaning the interest is accumulating and capitalized (added to the principal of the loan) all throughout school and beyond until they are paid off.
Thinking of the Next Generation
For those that are already in practice and are no longer accruing student debt but rather focused on paying it off, please don’t stop reading here. While this is important for students, it may be just as relevant to those that are in a position to reinforce this message to students. If you serve as a preceptor for pharmacy students and/or interact in other ways with students, please spend some time with them reinforcing this message and sharing about your own personal financial journey (highs and lows) so they can avoid making the same mistakes that we did
Buying at a Premium – Is it Worth It?
Let’s look at an example to emphasize that anytime you purchase something with student loan money that is accruing in interest, you are buying that item at a significant premium. If you go to Starbucks® and get a nice beverage of your choice for $4 as a first year pharmacy student using student loan (at a ~6% interest rate), that cup of coffee when you go to pay back the loan in 5 years (assuming you do), will now cost you 35% more ($5.40). Not cool dude, as my 4-year-old son Samuel says.
You can run the numbers yourself using a simple interest rate calculator. That is a pretty conservative estimate since most of your loans will not be paid off within one year of graduation and therefore the interest will continue to compound over time. Extrapolate this out to borrowing $10,000-$20,000 a year for cost of living expenses and you can see the killer that compounding debt can be.
Here is the take-home message. Everything you buy with student loan money you are buying at a significant premium.
The Impact of Borrowing for Cost of Living Expenses
While tuition and fees are expensive enough for pharmacy school, the amount that can be borrowed (with interest accruing) for cost of living expenses can be just as much. Depending on the institution, the amount borrowed for cost of living expenses (e.g., room and board, personal, transportation, etc.) can be upwards of $20,000 per year or more.
If we look at a student that is attending a pharmacy program that costs $20,000 per year (many wish their tuition was only this much!) and he/she takes out another $20,000 per year for cost of living, that individual will have borrowed $160,000 over four years. Unfortunately, the amount due at graduation will be much higher since interest would have been accruing on any unsubsidized loans (which are most graduate pharmacy loans). Therefore, including interest accrued; let’s assume a balance of $180,000 at graduation. If these loans were at 6% interest and the student selected the 10-year standard repayment plan, he/she will have a monthly payment due of $1,998 (wow!) for 10 years with a total payout of $239,804 (including interest plus principal).
If he/she were instead able to work through school (12 hours per week at $16/hr.) and take half as much out ($10,000) for cost of living, he/she would owe approximately $135,000 at graduation with a monthly payment of $1,499 (still sucks, but better) for 10 years with a total payout of $179,853.
That is a total savings of almost $60,000 all from working part-time during school to minimize borrowing for cost of living expenses. Now that is winning.
Am I suggesting that you should never go out and enjoy a cup of coffee or anything else for that matter? Absolutely not. However, when you are approaching six-figures or more of debt that is accruing interest and you are borrowing more for cost of living expenses, those expenses should be budgeted and limited. Tough message, I know.
Your Financial Homework:
- Set a monthly budget that minimizes as much as possible the amount you borrow each month. Look at areas to cut down (rent, going out to eat, etc.) that will allow you to avoid borrowing money at a premium. Here is a budget worksheet that you can use to get you started.
- Are you able to work during pharmacy school while maintaining good grades? Go for it. It is a double win in terms of minimizing the amount you borrow for cost of living expenses while getting real life experience that will make you more marketable for a job or residency.
- Know your loans inside and out. The more you know about your loans the more mad you will be that you have them and the faster you will want to get rid of them. Familiarize yourself with the loan type (subsidized vs. unsubsidized), the interest rate, refinance opportunities and the repayment options and amounts.
On another note, I have some exciting news to share! I am working on a new logo design for the web site and will have a few options to choose from here in a week or two. I am going to include those in an upcoming post to get your feedback!
As always, if you found this information helpful, please share with your friends and colleagues. You can also follow me on Facebook (www.facebook.com/yourfinancialpharmacist) and Twitter (@FinancialRPh).