Timothy O'Shea, MS, PharmD
Timothy O'Shea, MS, PharmD, is a Clinical Pharmacist working at a regional health insurance plan on the east coast. Additionally he works per diem at a nationwide retail pharmacy chain. He graduated from MCPHS University - Boston in 2015 and subsequently completed a PGY-1 Managed Care Pharmacy Residency. He completed his M.S. in Health Services Administration, with a focus on Health Economics and Outcomes, in 2018. His professional interests include pharmacy legislation and managed care pharmacy. He can be followed on Twitter at @toshea125.
According to the American Association of Colleges of Pharmacy’s 2014 Graduating Student National Summary Report, the average student loan debt for PharmD graduates amounted to $144,718 in 2014, an increase of 8.2% from 2013.
With pharmacists earning an average of $122,569 a year and pharmacy residents earning an average of $43,579 a year, it’s imperative for pharmacy school graduates to understand how to effectively manage their finances.
The following tips will ensure you take the correct steps to prepare for financial success:
Create a budget
According to financial guru Dave Ramsey, “When you make a budget, you take the first step toward getting control of your money so you can build wealth.”
Simply put, a budget is an itemized summary of income and expenses for a given time period. Setting up a budget provides insight on where your money is allocated and how to most effectively manage it.
For example, a budget shows if you’re spending too much money on dining out, or if you have extra money to put toward student loans and savings.
There are numerous online templates and software you can use to create a budget. Mint is one of the most popular free and versatile budgeting programs available.
Through Mint, you can create a personalized budget, link your credit or debit card, and track your spending. Mint can also send you alerts for unusual spending in specific areas, analyze spending trends, set financial goals, and keep track of student loans.
You Need a Budget (YNAB) is another good option, though it charges a one-time $60 fee after the free 1-month trial.
Pay down student loans
If you’re like most pharmacy students, then you’re graduating with what feels like an insurmountable amount of debt, and you might not even know where to start.
Unbury.me is a great resource to visualize how long it will take to pay off your student loans. Using the average student debt of $144,718 and assuming a 7% interest rate, a modest monthly payment of $1000 means it will take you 26 years to pay off your loans.
While this may feel like an extremely long time, doubling that payment to $2000 will cut the length down to just 8 years. Living at home or very frugally and paying down $4000 per month equates to having your loans paid off in just over 3 years.
However, keep in mind Unbury.me only serves as a guide. Federal and private loan interest rates and repayment periods will vary.
All newly graduated pharmacists should register at StudentLoans.gov, which provides a full list of your federal loans. The website also offers an exit counseling session, which provides important information you need to prepare to repay your federal student loans. It also offers a Repayment Estimator to estimate initial monthly payments, repayment plan eligibility, repayment plan cost comparison, and total interest paid.
Procedures for private loan repayment will vary based on your loan provider.
If you choose not to consolidate your loans and pay more than the minimum amount, then it is beneficial to put that extra money into the loan with the highest interest rate, rather than equally dividing it among all of your loans.
Advice for pharmacy residents/fellows
With an average salary of around $43,000, immediately paying off student loans may not be an option. Therefore, pharmacy graduates pursuing a residency or fellowship should consider a few different options.
For federal loans, you can apply for Income-Based Repayment, Pay As Your Earn, or forbearance. Under the Income-Based Repayment Plan, your federal student loan payment will be 15% of your discretionary income. Pay As you Earn Plans are similar, but you only pay 10% of your discretionary income.
The calculator on StudentLoans.gov mentioned above will determine the specific amount you would be responsible to pay based on your loan amount and resident/fellowship stipend.
Forbearance is an option for temporarily postponing payments if you do not qualify for a deferment, which most with a resident/fellow salary won't. It is typically granted in 1-year increments with a 3-year maximum duration.
Procedures for private loans will vary by loan provider, but most will offer some type of modified payment plan based on income. Not all will offer forbearance.
Although it will vary based on your financial situation, it may be beneficial to put federal loans into forbearance during a residency/fellowship. In the meantime, you can pay your private loans through a modified payment plan, which likely will have a higher interest rate than federal loans.
Consolidate loans...or maybe not
Consolidating multiple students loans has both advantages and disadvantages.
On the plus side, centralizing a significant number of different loans into a single bill can make repayment much less of a hassle. Additionally, consolidation may lower your monthly student loan payment by extending the repayment duration to 15 or 30 years, compared to the standard 10-year repayment plan for individual loans. You could also potentially lower your interest rate if your credit score has improved since you obtained the loan.
On the flip side, by increasing the length of your repayment period, you will end up making more payments and paying more in interest. Consolidation could also mean giving up favorable repayment terms such as a grace period, deferment options, and income-based repayment plans.
Before committing to consolidating student loans, it's important to consider your options closely. For more information on student loan consolidation, visit the US Department of Education or Bankrate.
Start saving for retirement
In his article entitled "10 Financial Tips for College Grads," Smart401k president Scott Holsopple explains the importance of saving for retirement the moment you have an income. Even if you can only afford $25 to $50 a month initially, contributing to your company retirement plan early on can have several benefits.
“Most importantly, you’re starting a behavior pattern. Beyond that, the benefits of compounding could turn your small monthly investment into a decent nest egg as time passes," Holsopple writes. "Even if you put $50 a month into your plan during your first year of employment, that $600 in contributions alone could grow into $13,952.08 over 40 years. And that’s just the beginning.”
Most employers offer a retirement plan called a 401(k), which they will match up to a certain percentage. Even with student loans and other expenses, it is wise to invest until the full employer match. As an additional benefit, the contributions you make into a 401(k) plan reduce your adjusted gross income, lowering your overall tax liability.
You can use this 401(k) calculator to to see how your money can grow with regular contributions. Note that the maximum 401(k) contribution per year is $17,500.
Another vehicle for retirement are IRAs, which are divided into 2 types, Traditional and Roth. These differ in terms of when you pay taxes, with Traditional IRAs requiring tax payment when you withdraw in retirement, and Roth IRAs requiring tax payment only when you deposit funds. Both have a maximum yearly contribution limit of $5500.
Investing in an IRA account early in your professional life can have a tremendous upside, due to the power of compound interest. For intstance, an individual who delays in maxing out annual IRA contributions from ages 25 to 28 will have lost an estimated $231,267 by age 65.
Create an emergency fund
In addition to retirement savings, you should begin building an emergency fund as soon as you have an income. The purpose of an emergency fund is to have easily accessible money you can fall back on when unexpected expenses arise, without worrying about going into debt.
An emergency fund should be reserved to cover expenses such as unexpected car repairs, medical emergencies, bereavement-related activities (flight, funeral, burial), emergency home repairs, or paying bills between employment.
Without an emergency fund, you could end up putting large sums of money on your credit card, which could be subject to very high interest rates if you can’t immediately come up with payments.
The general rule of thumb for emergency funds is to save 3 to 6 months of expenses in an easily accessible account, such as a checking or savings account. Ally is an online bank that offers a competitive interest rate of about 1% for savings accounts, making it a great source for your emergency fund.
Use online resources
There are countless online resources to help recent graduates appropriately manage their money. The AACP has an annotated Financial Literacy Guide for student pharmacists, which can be a great resource on student loans, budgeting, and other financial planning tips. Other helpful resource include Khan Academy, Bankrate, and MyMoney.
Popular finance-themed podcasts include The Dave Ramsey Show, The Clark Howard Podcast, and Stacking Benjamins.
If you’re still feeling overwhelmed, here’s a helpful graphic that summarizes how to appropriately allocate your money, starting from the top and working your way down.