Why Lowering Interest Rates for Student Loans is an Alternative to Debt Cancellation
Dr. Joey Mattingly, a faculty member at The University of Maryland School of Pharmacy, talks to Tim Ulbrich about a recent article published in the American Journal of Pharmaceutical Education titled Before we talk about student debt cancelation, can we talk about the interest rates? They cover the basics of loan terminology, discuss why lower interest rates would have such a significant impact on student indebtedness and discuss the reasons why lowering interest rates may be a better option than loan cancellation or forgiveness.
About Today’s Guest
After graduating from the University of Kentucky College of Pharmacy and Gatton College of Business and Economics, Dr. Mattingly dove directly into pharmacy practice for The Kroger Company as an EPRN super trainer, facilitating the implementation of a new pharmacy information system software to more than 40 pharmacies. After completion of the pharmacy system rollout, Dr. Mattingly managed four different Kroger Pharmacy locations (L292, L780, L366, and L389) between 2010 and 2012, revamping operations at each location to improve multiple business and patient care activities. Dr. Mattingly was promoted within Kroger to serve as District 6 Pharmacy Coordinator in the Mid-South Division, based in Carbondale, Illinois, overseeing operations for 12 pharmacies.
In 2013, Dr. Mattingly left The Kroger Company to lead Indianapolis operations as general manager for a start-up long-term care pharmacy company called AlixaRx, providing pharmacy services and remote automated dispensing systems to 23 skilled nursing facilities (SNFs) across Indiana, Kentucky, and Ohio. He currently serves as an associate professor in the Department of Pharmacy Practice and Science at the University of Maryland School of Pharmacy, where he teaches business strategy to students in the professional program and is a strategic consultant for the University of Maryland Medical Center Department of Pharmacy. In 2016, Dr. Mattingly was selected as the graduating class Teacher of the Year.
In addition to his work as a faculty member, he serves as the Director of Operations for the PATIENTS Program and recently earned his PhD in Pharmaceutical Health Services Research with a special focus in pharmacoeconomics. Dr. Mattingly is also passionate about policy and parliamentary procedure and is the Speaker of the House of Delegates and Board of Trustee for the American Pharmacists Association. He has previously served the American Pharmacists Association Academy of Student Pharmacists (APhA-ASP), the Kentucky Pharmacists Association (KPhA), and Phi Lambda Sigma Pharmacy Leadership Society as speaker of the house.
Summary
Dr. Joey Mattingly joins Tim Ulbrich to discuss some important pieces from his APJE article titled Before we talk about student debt cancelation, can we talk about the interest rates? He also breaks down key loan terminology, what the math on interest rates shows, and four reasons in favor of supporting lower interest rates instead of debt cancellation.
To kick off the episode, Joey discusses what the words principal, term, interest rate and amortization mean in regards to student loans so that everyone has a basic understanding of what this debt is comprised of.
Joey then jumps into this APJE article titled Before we talk about student debt cancelation, can we talk about the interest rates? Using the AACP Graduating Student Survey from 2017, Joey estimates that that graduating class carries a total of $2 billion in student debt. Although there are Presidential candidates that are discussing loan forgiveness, Joey encourages a discussion of lowering interest rates. By lowering interest rates, principal balances will come down quicker and monthly payment will be less expensive. Joey talks through what this math looks like for interest rates at 6%, 3% and 1.5% When looking at a 6% rate, after a 25 year term, the total interest accrued for the $2 billion of student debt is $1.9 billion, almost double the principal. Lowering the interest rate to 3% or 1.5% significantly reduces interest as well as lowers monthly payments.
Joey also talks through four reasons to support lower interest rates instead of debt cancellation: resentment, incentive realignment, decision making uncertainty, and public support for lower rates.
Mentioned on the Show
- YFP Planning
- Before we talk about student debt cancelation, can we talk about the interest rates? by T. Joseph Mattingly II, PharmD, MBA, PhD
- YFP 005: The Impact of Rising Student Debt on a Pharmacist’s Income w/ Joey Mattingly, PharmD
- YFP 114: Presidential Candidates’ Plans for Student Loan Forgiveness w/ Richard Waithe, PharmD
- RxRadio
- Refinance Your Student Loans
- AACP 2017 Graduate Student Survey
- Evaluating the Changing Financial Burdens for Graduating Pharmacists by T. Joseph Mattingly II, PharmD, MBA, PhD and Timothy R. Ulbrich, PharmD
- YFP Facebook Group
- Is There Room for Efficiency in Pharmacy Education? by T. Joseph Mattingly II, PharmD, MBA, PhD
- YFP 124: The Behavioral Investor w/ Dr. Daniel Crosby
- The Laws of Wealth: Psychology and the secret to investing success by Dr. Daniel Crosby
- The Behavioral Investor by Dr. Daniel Crosby
Episode Transcript
Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. I’m excited to welcome back onto the show Dr. Joey Mattingly to talk about one of his most recent articles published in the American Journal of Pharmaceutical Education titled, “Before We Talk About Student Debt Cancellation, Can We Talk About the Interest Rates?” Joey was on the Your Financial Pharmacist podcast all the way back in Episode 005, where we talked about the impact of rising student debt on a pharmacist’s income. So a little bit about Joey before we get started: After graduating from the University of Kentucky College of Pharmacy and the Gatton College of Business and Economics, Dr. Joey Mattingly dove directly into pharmacy practice for the Kroger Company, where he facilitated the implementation of a new pharmacy information system software to more than 40 pharmacies. He managed four different Kroger Pharmacy locations between 2010 and 2012, revamping operations at each location to improve multiple business and patient care activities. Dr. Mattingly was promoted within Kroger to serve as the District 6 Pharmacy Coordinator in the Midsouth division, based in Carbondale, Illinois, overseeing operations for 12 pharmacies. In 2013, Dr. Mattingly left the Kroger Company to lead Indianapolis operations as General Manager for a startup long-term care pharmacy company called Elyxa Rx, providing pharmacy services at remote automated dispensing systems to 23 skilled nursing facilities across Indiana, Kentucky and the great state of Ohio. He currently serves as an associate professor in the pharmaceutical health services research department at the University of Maryland School of Pharmacy, where he serves as a strategic consultant for the pharmacy department at the University of Maryland Medical Center in Baltimore. Joey, welcome back to the Your Financial Pharmacist podcast.
Joey Mattingly: Thanks, Tim. I’m very excited to be back with your audience.
Tim Ulbrich: So the commentary you wrote for AJPE, again, titled “Before We Talk About Student Debt Cancellation, Can We Talk About the Interest Rates?” I really enjoyed this work. It was simple, it was straightforward. And I thought it was very effective in helping the reader understand the basics of loan terminology — and we’ll talk about some of that here today — as well as why a conversation around lowering interest rates should be happening alongside or potentially in place of the debt cancellation/forgiveness discussion that we discussed here on Episode 114 of the podcast with Richard Waithe from RxRadio and certainly I think many of our listeners are familiar with through the Democratic presidential debates that have been ongoing. So in this interview, we’re going to hit the high points of Joey’s article that he published in AJPE, but please make sure to check out the show notes, where we’re going to put a link to the full article. And it’s an open access journal, so you can read the article in its entirety. So Joey, before we jump into the specifics of your article – and again, you do a nice job of this in there as well, let’s break down some of the loan terminology, specifically principal, term, interest rate, and amortization to make sure we’re on the same page. So let’s start with principal. When you define the principal of a loan, what is it? Let’s start there.
Joey Mattingly: Absolutely. So and again, this is great, well-timed, Tim. Actually, I gave this exact topic today in my pharmacy management class at the University of Maryland.
Tim Ulbrich: Awesome.
Joey Mattingly: My students — and I always, because I think it’s important as any manager as well to understand debt. And I really — the goal for this article is not to scare people or freak people out because a lot of students when they’re graduating, you know, there’s that anxiety and fear around their debt. And I hope — what I love about your podcast and the work with your group is I feel like you’re doing your very best to try to empower students to understand their financial situation so that they don’t — rather than fear and anxiety, maybe they feel more hope and optimism. So anyway, I just start by hey, let’s break it down. So when we start, the biggest component that comes right off the bat that we think of is the principal. That’s that amount that we borrow from the lender. So thinking of if it’s going to cost me $100,000 to go to pharmacy school or $200,000, I guess that’s a whole other podcast episode, what am I going to have to borrow overall? And that’s the amount that’s really if you did not have — if you had all the cash in your bank account or your parents had a lot of money to help pay for your school, they would just pay your tuition, right? And so they would use, if it was $200,000, they would write a $200,000 check, right? Or whatever that may be. Whereas if you do not have the money in your bank account, then we look to financing. And so we start with the principal.
Tim Ulbrich: Yeah, and I think starting there, and you do a good job of this in the article, the way I think about it here too is if we have a P3 student listening and here we are fall semester of 2019, and let’s say they borrowed $10,000 for fall semester, that $10,000 and whatever that loan may be, unsubsidized loan, that’s the principal. But as you mention in the article, obviously we can’t stop there when we think about the full amount that somebody may end up being in debt because we have to think about the term as well as the interest rate. So why don’t we go on from the principal and talk about the term and the interest rate.
Joey Mattingly: Well, before we leave principal, one thing I think that often gets overlooked too is that when we’re having that initial transaction and say — so I keep using, I like easy numbers, Tim, I hope it’s OK.
Tim Ulbrich: Yeah, yeah.
Joey Mattingly: I know for everyone, the challenge is it becomes complicated when it’s $7,342 or whatever. So I always round and say, OK, say I need $100,000. If when I’m trying to get that initial loan, there are often costs that go into the transaction. And in the case of a student loan, often they’ll call them origination fees or things that around if you look at the Department of Education, you’ll see anywhere from about 1% to about 4.2%. So even in that initial signing the paper, once the $100,000 is transferred over into say it went into your account, if you tried to give that money right back to the lender, you’re going to pay possibly $4,200. Right? So there’s a cost in just the transaction.
Tim Ulbrich: And I think that origination fee, as you mention in the article, is often overlooked but so important, especially the students listening, that you understand how that is calculated and roughly what that may be in terms of the impact. You know, just this past week, I had the opportunity to speak with the vet med students here at Ohio State, and as we all know, the way these loans are typically presented to you, it’s hey, here’s the max. And sign the line, and the rest is good. And so often students will say, “Well, why not just take that? And then if I have anything left over, I’ll return it or whatever. At some point, hopefully I’ll be able to pay it off.” And I think what you’re describing here is so important is that right off the bat, you have that origination fee that anything you can do to minimize the amount that you borrow from the beginning is going to help you in the long run.
Joey Mattingly: Yeah. And then one of the things that — and I always go back to percentages and thinking about percentages versus whole numbers. And I can’t take credit for this, I actually, when I think of the whole reason why my whole life has changed when I think about percentages versus whole numbers, is because of an independent pharmacist in Kentucky that was originally from Alabama, so he’s got kind of an Alabama accent, and I would always tell him, I’d say, “Hey, Leon, we’ve got this medication. We’ll make 80% gross profit on it. We’ll make 80%. I’m so excited.” And he’s like, “Joey, how many dollars will I make? How many dollars will I make?” And it blew my mind. Tim, I had an MBA. I was the smart business guy. And it was this independent pharmacist for 25 years that said, “Joey, I need to make this many dollars,” dollahs, as he would say. So when you think about that for a second. As student loans increase or as the cost of tuition, the cost of room and board, all those other costs, as it increases, the percentage may stay the same, but what your total dollar amount that you need — so in a way, like guess what? If I’m a loan, if I’m giving out the dollars, if I am the person giving out the dollars, what does it cost for me to — as you’re thinking about it, like they’re able to make more whole dollars, not just yeah, that’s 4.2%, but it’s part of that incentive for the numbers to just get bigger. So anyway, we can move on to term, but I just wanted to, as we think about this, yes, it may be 1% or 2% or 3%, it may seem like nothing, but as we see the numbers get bigger and bigger, 1% and 2% can make a big difference.
Tim Ulbrich: And I think that’s a great point, Joey. You know, and we’re not talking here about tuition, whole separate — as you mentioned in the article — whole separate issue, whole separate topic for a different day, certainly a factor, but to your point, when you talk about something like an origination fee, we often see these presented separately where we’ll see OK, tuition has gone up x% this year, but it’s not just the increase in tuition, which is then going to increase what you need to borrow, it’s the increased amount that you’re going to borrow, which also increased your origination fees and then, of course, as we’re going to move onto here, the term in which you’re borrowing as well as the interest. So take us through those two terms.
Joey Mattingly: Yeah, so now the term. This is the one that we — when I say we, as graduates, as students, when we’re signing up — or not when we’re signing up, actually. So the difference — the interesting thing about student loans is that you don’t determine the term until you graduate. I think that’s something very different than when you’re buying a car, right?
Tim Ulbrich: Yep, right.
Joey Mattingly: So when you’re buying a car or buying a home — and often, when we’re buying a home, there’s opportunities to refinance and everything, which we can do that as well with student loans. I think you’ve got plenty of topics on that, you know. But when we get to the term, that’s just the time. That’s just the time that you’ve agreed to pay back the principal, principal and interest, I guess, over a period of time. And so what’s common is for student loans is somewhere between 10 and 30 years. 30 being the longest, which oddly enough, they have like the extended repayment plan is set at 25. So we often see 10 and 25 are common. But then I think there are other plans with the Department of Education where you can extend it out to 30. And that leads — and so we get the time built in. And again, we decide, you kind of get that exit counseling at the end of school. And so that’s often where you’re signing up. And think about what’s happening with some of our graduates right now. Tim, when you and I graduated — and we won’t talk about how long ago that was — but it was in a time when there was still a period where pharmacists were getting maybe bonuses, maybe we were getting multiple job offers, and let’s be real for a moment, we know a lot of our students right now aren’t in the same boat that we were in a few years ago. And so if I had been aggressive, which I wish I had gone back and was a little more aggressive at that time and taken a 10-year note, Tim, I just had my 10-year pharmacy school reunion this past, I guess, what was it? Two weekend ago back at the University of Kentucky. If I had not — so I initially signed up for a 25-year repayment plan. And I had been in that repayment plan for a few years, and after a couple years realizing oh my gosh, my principal isn’t going down. And so that’s what — and again, I would like to think I’m a smart person. I know how to do a lot of math, I’ve got the business and the degrees I think to say it. But a lot of it’s not about whether you can do the math, it’s about whether or not you’ve got the mental —
Tim Ulbrich: The behavior.
Joey Mattingly: The behavior. Will you do it?
Tim Ulbrich: Absolutely. And you had me reflecting back on when I graduated and the offers relative to the salary, and I’ve always tried to show graphs on debt-to-income ratio, debt-to-income ratio, debt-to-income ratio, where have we gone in the last 10 years? And if I’m correct off the top of my head, I think the median indebtedness for a pharmacy graduate in 2010, I believe in 2010 was $100,000. And so here we are now in 2019 and that now is north of $170,000, which you look at what’s happened, the Bureau of Labor Statistics I think for all pharmacists’ median salaries is a little bit misleading to the reality of the job market of somebody coming out today, but I would argue the entry-level community pharmacists in 2010 probably was making more than they’re making here in 2019, but we’ve seen the debt numbers go in the exact opposite direction. So you know, as you and I wrote an article on before and we’ve talked about in Episode 005, what’s the purchasing power of an income? And I think what we’re getting to here is when you think about your debt side of the equation, you’ve got what you borrowed to begin with, your principal, and then you’ve got the interest that’s accruing while you’re in school. And for unsubsidized loans, obviously that’s happening along the way and ultimately, we get to the point where those capitalize and it grows baby interest over the term, which as you mentioned is the repayment term, anywhere from 10 up to 30 years. So interest rate then is the next variable we’re looking at. So just basic definition of what is interest?
Joey Mattingly: Yeah, so this is what — if you think about it, this is sort of what the company that’s giving you the loan, they’re taking interest as sort of to cover their cost. So this is the amount that’s above, you know, I guess the way the U.S. Department of Education, is the cost of borrowing that money, it goes to the lender. And so if the lender is a nonprofit, then in theory, you’re just going to have the revenues meet the expenses and no additional profit. If the lender is a for-profit, so then we think about our private banks, we think about payday loan lenders or whatever, you’re playing with that number. Those interest rates are what puts food on your table as a lender. So anyway often we think about it annually. But I think it’s important to consider how — and again, as we roll into the more complicated thing, I think some folks can get down principal, term, and interest rate. It’s when we start to amortize the loan is when things get fun. But that’s where I really think we can have a big impact when we discuss amortization. But for student loans, it should range between 3-8.5%, which when you hear 8.5%, you’re like, it’s not our parents’ interest rates. And so that comes up. I make sure I have that conversation with folks is that I pull up 1980s numbers because I think about my father graduated high school in I think ‘80-’81, something like that, and as he was thinking about college, if you took out a student loan, comparatively or relative, you could get a 3.5%, 4%, 5% loan. Auto loans in the early 1980s were something like — it got as high as like 20% at one time.
Tim Ulbrich: That’s crazy.
Joey Mattingly: And so thinking about that, if interest to buy a house was 20%, then yeah, we’d say 8.5% is not too bad. But I just think it’s really important for us to understand that the area of interest rates — and that’s, again, the whole part of this exercise, the whole bulk of this article, but just to understand that these aren’t our parents’ interest rates. And so often, we think about our parents as our sometimes the folks that give us advice, you know? And we hope that they’re — and they’re trying, they want the best for us and are trying to give us some advice on how we can handle things. The number of times I hear people talk about how good student is, man, it’s something that — I don’t know how you feel about it, Tim —
Tim Ulbrich: I’m with you, I’m with you.
Joey Mattingly: I just don’t like calling it a good debt. Like you know, let’s talk about the math. Let’s do math first.
Tim Ulbrich: Yeah, let’s talk about the math, let’s talk about the career path, let’s talk about what you’re trying to achieve, what’s the ROI? I mean, so many factors that go into that. I mean, I think it’s a blanket statement that probably gets assumed too easily and too often. And I love what you had to say about advice we get from our parents because that’s something I hear so often from others, and this really gets to the concept of anchoring where when we talk to somebody and they’re like, “Oh, well, back in the day, my interest rates were 17% to buy a home.” All of a sudden, you look at 7% or 8% and you think, oh, not too bad. But even in that range you give in the article of 3-8% or so, as we know, as we’ve run various refi numbers and scenarios, having a 5% versus a 7% when you’re talking about $200,000 of debt, that’s a big, big deal. And so really digging in deep, especially for those that are in active repayment, understanding your options about what am I looking for in a repayment strategy and for those that are currently in school, really understanding and looking at what can I be doing right now to try to minimize any of the indebtedness while I’m in school. So Joey, in your article — so now that we covered the total cost of loans, which is inclusive of principal, term and interest rate — in your article, you mentioned that “for PharmD students, focusing on the impact of interest rates on their monthly payments and the total term (amortization) for their student loans may be the most beneficial approach to helping them achieve their personal finance goals. So there’s that term, amortization. So talk us through what you mean by that. Why is that the case?
Joey Mattingly: Yeah, so I highly recommend if this is the first time, if you’re an audience member listening and you’ve never really, you’re not familiar with the word amortization, get on the Google right now and start learning what amortization means. And download a free, I keep a free amortization calculator on my phone one, because I’m a nerd, but two, I mean, so it doesn’t matter what it is, if it’s a car or if it’s a house or whatever I’m in the process of discussing, I like to just throw out, look at the amortization schedule, play around with the numbers, see what it looks like if interest rates change, if terms change. So basically, the amortization schedule is simply the — when a lender is lending money and you’re agreeing to pay this back, it’s set up in a way so that the monthly payment is a fixed amount. And so you calculate it out so that the principal and the interest are captured over however many payments it is. And so it’s actually, there’s not a function of time, it’s a function of really how many payments and how frequently is the interest being captured. But typically, we think of it as annually, and then within that year, often you’ll see like 12, each month you’ll see things. So wanting to know how frequently does the interest start compounding because that’s something as well. So anyway, I don’t think listeners have to become experts in it, but I think getting to an amortization calculator quickly is a smart thing to do. Like being able to just pull up one of these calculators that has the different variables for you and then start with something simple, you know? Put $100,000 in it, put 5% interest rate, and just change the term from 10 to 20 years or change the term. And then look at the schedule, so the amortization schedule will map out all 120 months in the 10-year loan. And then if you switch it to 20 years, it will map out all payments for the 240 payments, the 240 months. And so that allows you then to break out what’s going, each month, how much is being contributed to the interest? And how much is being contributed to the principal? And this kind of really breaks down the nuts and bolts of your loan. And so that was sort of the purpose of this, getting into this and then walking through an example of — I use the class of 2017 as an example, and we had a little over $2 billion in student debt potentially estimated for this class. And you know, so we take that $2 billion and start thinking, alright, what if the average interest rate was 6%? And we start plugging it in. So that’s sort of what I hope folks as they follow along, they don’t get lost in the math. It’s meant to stay simple, but we wanted to use a real-world example to talk about how just changing those numbers from a 6% interest rate and then changing the terms or whatever, what would happen? And then if we were to hypothetically lower the interest rate, what would happen?
Tim Ulbrich: Yeah, and I echo your recommendation to our listeners. If you have not dug into an amortization table before, please do. Whether it’s your student loans or buying a home, I think it’s really powerful to be able to see if you’re on a 30-year type of mortgage repayment, for all of those months, how much would be going toward principal? How much would be going toward interest? And for those of you that are making those payments, you know very well when you get those statements, you’re like, man, I send in a big check, but only a little amount actually went to pay off the principal on the loan. And I think it’s a small but very important behavioral move that as we talk about over and over and over on this podcast, the more educated you become, the more empowered you feel, the more informed decisions that you make. And I think looking at an amortization table is just a great example of doing that versus you just blindly accept the debt for what it is. So Joey, let’s dig in. You talked about in the article, you walked through a case study using the class of 2017. You used the projections and the data provided by the AACP Graduating Student Survey, which we’ll link to in the show notes for those that have not seen that before. And obviously, those numbers have even gone up here in the last couple years. But you noted a total of indebtedness — if we assume across the entire cohort, all the graduating students, a little over $2 billion. And you then walk through essentially three different assumptions: one with an average interest rate of 6%, one with an average interest rate of 3%, and one with an average interest rate of 1.5% to determine what would essentially be the savings to the borrower and thus, the cost, I guess for lack of a better word, cost to the federal government if we were to move in this direction of actually lowering rates. So tell us more about what you found when you ran through that scenario.
Joey Mattingly: Yeah, so — and again, as the title of the paper sort of signifies, that there’s a lot of discussion around what if we forgive the debt, forgive the debt, forgive the debt. And I just thought that that is a pretty big jump. And whatever your politics are, that’s fine. I just want to make sure that we have a discussion around the issue of potentially the interest rates being problematic. And if we were able to — whether it’s subsidize or come up with a way to offset the interest, we could actually show gains, the students could — graduates, I should say — can make their payments, see their principals coming down, and pay off their loans. And from a budget perspective — and this is probably more our article that we did a couple years ago when we talked about what that payment is and budgeting out that student loan payment — and so as you walk through the scenarios, at 6%, this $2 billion in debt — I thought it was interesting to, I wanted to point like what if it was the entire cohort of students? Because you know, maybe the CEO of CVS Larry Murlow’s listening right and he’s thinking, hey, what can we do to help our pharmacists? So maybe CVS or Walgreens, one of the big boys, will step in and say, what if we wanted to help out? Have the Walgreens, CVS loan program.
Tim Ulbrich: Absolutely.
Joey Mattingly: So say that we were looking at that. The interest paid at the full term, so over 10 years for someone if we average it out at 6% and students had a mix of 8% and 3%, whatever — I like to keep the numbers simple for an article like this, so I just picked 6% — that we would see on the $2 billion about $677 million of interest would be collected over a 10-year period. And then if you were to take that out to 25 years, so if all the students picked 25-year terms, the total interest paid over a 25-year period would be $1.9 billion. So you actually, you essentially double —
Tim Ulbrich: Double, right.
Joey Mattingly: Double the principal. I mean, so you know, it’s interesting — and that’s just extending the repayment. That’s not messing with the interest. And then I started saying, well, what if we cut in half. What if we cut it down to 3%? 3% is like — in economics, we love that 3% number for an inflation number.
Tim Ulbrich: Inflation.
Joey Mattingly: Yeah. Because it’s probably more accurate on the whole for different types of areas. So anyway, let’s just say we were able to cut it to 3%. Well, as you’d imagine, when you start working out the math, it has a significant impact. Actually, one of the things I probably should point out is the monthly payment for students, the average monthly payment at that 6% level over 10 years is $1,815 a month. Now, imagine a resident trying to pay that. Imagine a pharmacist who took a full-time job but their hours got cut to 32 hours a week, imagine now paying that $1,815 a month.
Tim Ulbrich: For 10 years.
Joey Mattingly: For 10 years, right? So just cutting the interest, we knock $300 off of that 10-year scenario. And as we continue to cut, we cut $400 a month off if we — and I wanted to show an ultra-low, like what if it was just 1.5%? What if it was just enough to like this is the CPI? Economists would argue that’s too low for inflation, but let’s just say we had some philanthropy or something involved to offset so we got some dollars in interest. Because remember, the interest is the cost of the borrowing, the cost of the $2 billion. So anyway, just in doing that alone in a 10-year scenario, you’re knocking $400 a month off for each student. And when we look at the 25-year term, it’s that same kind of you’ll see about a $400 a month knocked off their payment, but you’re going from $1,000 a month to $654 a month in terms of your payments. And a lot of pharmacists can afford, we’ve gotten used to paying those $1,000-1,500 a month payments. So if you’re paying $1,500 a month but your interest, you’re actually able to get it done in 10 years, that’s — I don’t know, I just wanted to show that you can have significant impact in bringing it down. And one of the things I wanted to show in the article was I wanted to show a picture of just how the interest in terms of the amount of principal paid comes off. It’s not a linear line. It’s curved because your principal comes off at a faster rate later in the term. And so I think it’s disheartening for a student or a graduate in the first five years out because in the first five years, if you’re even on a 10-year repayment, you’ve only got about 40% paid off. It’s not exactly half, you know? In a way, it just I think — doesn’t it feel a little disheartening when it feels like it’s taking a long time to come off?
Tim Ulbrich: It does. It’s like the first five years of a mortgage. Same thing. You see those statements, as I alluded to, and the student loans, exactly. You’re making these big payments and you feel like you’re not making the momentum that you should. And this is where we hear from people, especially those that decided to more aggressively pay them off, whether that be a refi or not, they’ll say things like hey, I made an extra $3,000 payment. Boom, you jumped on the amortization table. That goes directly toward principal and then they start to feel like they’re getting a sense of momentum. And separate conversation for a separate day, but I think what’s interesting — and I would encourage our listeners, again, check out the article, this is all in Table 1 where you can see the data, but what we’re not even talking about here is what’s the opportunity cost of what that money could be doing? So when you talk about a 10-year term and you talk about going from a 6% rate to a 3% rate, essentially that would take it down to a little over $1,800 a month to $1,579 per month. Well, what happens then if that difference you invest in your 401k, your 403b, your Roth IRA, you make extra home payments, you’re investing in growing businesses? I mean, what’s the value of that? And how do you even start to factor all of that in? So what I want to wrap up on, Joey, is I thought you did a really nice job at the end of summarizing really four reasons that you think this concept really is in favor of supporting lower interest rates over debt cancellation. And you talk about resentment, incentive, realignment, you talk about decision-making uncertainty, and public support for lower rates. So let’s walk through those briefly. When you say resentment, what do you mean by that? Why would this type of plan be more favorable compared to something like debt cancellation?
Joey Mattingly: Yeah, so this is the — I mean, honestly, if I could weight them, this is probably like I’d say 50-60% of one of the things that we need to really consider is that while — and I even put, I don’t know if you noticed in the paper, you know how, so for when we write academic papers, we put out our conflicts of interest?
Tim Ulbrich: Yes, I saw that.
Joey Mattingly: I put in my conflicts of interest, I said my wife and I have student loans. I was like, it’s absolutely — like I absolutely have a conflict in writing this paper. Now in the case, I’m actually arguing against my own best interests, you know. But I’m saying that so I have a lot of friends who have sacrificed or made choices in their life where whether it was maybe not buying a home right away, maybe even delaying having children, maybe it was whether they stayed in the same car for an extra 10 years and kept it going or whatever it was, the sacrifices that they made, didn’t go on trips or whatever, so that they could put larger chunks of their income right on top of those students loans and get them paid off. Now imagine my classmates that I love to death, we have grown through pharmacy together, find out that magic wand is waved from the federal government or whoever, and your loans are paid. Right?
Tim Ulbrich: Right, right.
Joey Mattingly: Now, they would probably think for the last 10 years, oh my gosh, they could have been investing in the stock market, they could have started a business, they could have done all these things had they known. And now, I totally agree that yeah, that would feel really, that would feel kind of challenging. Now, for some would say, well, you know, I’m still in principle OK with getting rid of the student debt just because you’re against, you know — maybe your politics are that you’re against students having this much debt to begin with. That’s another discussion. I just think that that’s an unintended consequence of this, and I think in a way, it sort of polarizes us. We get into these bigger philosophical discussions about what’s fair. And I just, I think that we can get past that. So I just wanted to put that out there. I think that’s a big one.
Tim Ulbrich: And I would agree with you. I think your percentage weighting is accurate. We actually had this out on the Facebook group, on the YFP Facebook group, a couple months ago when the candidates’ forgiveness/cancellation plans came out. And the word “fair” was by far the word that kept coming up over and over again. And some people were, as you mentioned, even though I’ve gone down that route, I still am in favor of this for various reasons. But I would say largely, many people had this concern, well, what about the people who have already paid this off? Is this fair? And that word, “fair,” did keep coming up. So the second thing you mentioned is incentive realignment. Tell us about that.
Joey Mattingly: Yeah, so I’ve shifted to become more of a health economist over the last few years in my studies and so incentives are something that I look at all the time and what are the things that the healthy behaviors that we think about, but anyway, in this particular case, imagine a policy shifting that saying, OK, we’re forgiving student loans. Does that tell future students or people who are thinking about doing another degree or whatever it may be to take out the maximum amount when maybe they don’t need the maximum amount? Because oh, hey, maybe it will just be forgiven later. And so I think there is a potential unintended consequence that may make it to where it’s not — we’re not aligning the incentives appropriately. And then one of the things I think would be kind of odd — again, this is theoretical, I don’t know this for certain — but think about some universities right now. We have a lot of universities, organizations, that they recognize that this is a problem. And I think some — and again, we could have a whole other discussion on whether or not schools are being more efficient — but that’s one of the things I do think some schools are working to become more efficient. And what if their consumers, the people paying the tuition, all of a sudden come into a windfall of more tuition dollars? Does this sort of put them in a situation where they’re thinking, oh, well, no sense in being efficient, anyone can pay for it?
Tim Ulbrich: Yeah, does it de-incentivize the efficiency? And you wrote a piece on the efficiency of the PharmD education.
Joey Mattingly: I’m just trying to get more citations.
Tim Ulbrich: We’ll link to that in the show notes as well. So the third point you make here — and again, we’re talking about reasons to support lower interest rates over debt cancellation — is decision-making uncertainty. What do you mean by that one?
Joey Mattingly: Yeah. So and I wanted to give an — I tried to give an example of myself. You know, my wife and I, as I stated, have student debt balances as we’ve worked to pay these things off. And we have a mortgage, we bought a home. Well, with all of this stuff happening in the politics, the national politics, Ashley and I have been working hard to take extra dollars putting on our student loans. You know, you listen to Your Financial Pharmacist, we’re trying to follow good behaviors and do those things. Well, for the next 12-24 months, Ashley and I have had the discussion, should we put that extra money in a savings account or somewhere or even towards our mortgage at least until we figure out what’s going to happen? Because you know, for those who are holding debt, I mean, come on. Like that would be dumb financially for me to not consider the prospects of that debt being paid off. And then if it never happens, if my debt doesn’t get magically forgiven by whatever policy, then if we invested wisely, we should be able to take that money from our savings and then put it on the debt. But in a way, that’s going to cause more interest rates — we’re going to pay more interest over that in the short term. But it’s kind of one of those risk things. But I just think it causes some uncertainty in decisions and whether that’s good and bad, I just think that it’s a negative to like look, while we’ve got this uncertainty, we don’t know what’s the best thing for our money.
Tim Ulbrich: That’s a great one. And the last one, which is of course of interest, you know, what would be the appetite for something like this in terms of the politics and the public support? And you addressed just that, the public support for lower rates. So what did you find in the literature and how this compares to debt cancellation?
Joey Mattingly: Yeah, so you know, when you think about it, it shouldn’t be that surprising when we think of if you ask in a general survey about interest rates on loans, no one likes interest rates. Like why would anyone — like I’ve never met a person that’s like, man, you know, I think they should raise our rates. I feel like I should be giving more to the financial institution. And so now I’m assuming the 12% that disagreed must work for a lender, right? Because like why would you be against lower rates? Now, I think that’s going to be the flip side is when you’re thinking about if folks are trying to lobby for lower interest rates or even debt forgiveness, actually, either way, you’re potentially destroying an industry where people work. OK? So those interest rates are paying people’s salaries. They are paying companies, lenders, it’s going to those groups. And so you’ll eliminate the need for those groups. But let’s not forget that there’s people behind that. And so that also means lobbying groups or whatever. There are going to be companies that are going to be very much against anything like this, that may even if we all believe as a society it’s good for us, there’s special interests that will be against it. But overwhelmingly, like from a general population standpoint, I think this is something we can all get behind. And Democrat, Republican, whoever, like you can support this without it being too political. And that’s one of the things too because I know this argument has gotten so political. And once you put on your red and blue hats, like you might as well stop talking.
Tim Ulbrich: Yeah, and this reminds me, Joey, I recently had the pleasure of interviewing Dr. Daniel Crosby, who wrote the New York Times bestseller, a couple books, “The Laws of Wealth,” and most recently, “The Behavioral Investor.” And he talks about the contentious debate of passive versus active investing. And he actually proposes an alternative, kind of a third, takes the best from both worlds. And this reminds me a little bit of that. You know, I think that when some bold proposals come out like debt cancellation or loan forgiveness, there tends to be OK, I’m on the yes side, I’m on the no side. And we forget about what other solutions that exist. And I think your article did such a nice job of OK, what other viewpoints are there? And is there a solution that can get us all on board of trying to move the needle on this rather than something that may be more polarizing that actually never moves forward. So Joey, I appreciate your time. Again, for our listeners, what we’ve discussed is a commentary that he wrote and authored in the American Journal of Pharmaceutical Education titled “Before We Talk About Student Debt Cancellation, Can We Talk About the Interest Rates?” So Joey, I greatly appreciate your time and your work here and the support that you’ve had for what we’re doing over at YFP.
Joey Mattingly: Thank you, Tim.
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