Debating Student Debt and Making Sense of Statistics

AUGUST 03, 2015
Benjamin S. Barnhart
Whether you are fresh out of school or a pharmacist with years of experience, chances that you are facing a 6-figure debt load from your education are pretty high. For this reason, pharmacy school graduates may benefit from the services of a financial professional.
 
How to Decide Between Saving or Paying Down Debt
The “6% or less” rule is useful in making decisions regarding a timeline for debt repayment. This simply means that if the debt you are carrying, such as student loans or mortgages, has an interest rate of 6% or less, you may be better off stretching out the term as long as possible and making the minimum payments toward the debt. Doing so will offer you the opportunity to save or invest the difference between old and new monthly payments. 
 
If the interest rate is more than 6% or the debt is on an asset that is depreciating, such as a vehicle, you should pay down the debt more aggressively because outpacing a 6% interest rate with investment return is much more difficult.
 
A Case Study
Chris was 27 years of age, single, and living in an apartment. He had amassed $80,000 in student loan debt, and his gross salary was around $110,000 per year. He wished to buy a condo in 3 years, retire by age 65, and pay off his student loans. 
 
Having used an online financial planning tool offered for an extra fee by his 401(k) provider, Chris realized that he wanted a plan that would help him prioritize these goals. With that, Chris sought out help from a local advisor.
 
The advisor recommended maximizing his 401(k) contributions, which put him on the right track to retire by 65, as he is still quite young. The next recommendation fulfilled Chris’s other goals: paying off his student loans and having the ability to purchase a condo in 3 years. Consolidating all of Chris’s student loans enabled him to lock in a low fixed-interest loan with a 30-year term. While this certainly extended the amount of time it would take to fully pay off the loan, he reduced his monthly payment from $900 a month to about $500 a month. This gave him the extra cash flow he would need for a down payment on a condo in a few years. 
 
Three years later, Chris used his extra savings of $400 a month as a down payment on a 30-year mortgage for his new condo. His monthly payments for the condo ended up being $300 a month less than he was paying for his apartment, and he was able to put those savings toward paying off his student loans. Now, the loans will be paid off in approximately 10 years.
 
Although Chris did feel nervous at first about stretching out the term of his student loan to free up cash for his other short-term goals, he now feels very confident that it was the best thing to do in the long run.
 
Final Considerations
Tuition increases have led to sizable debt loads for pharmacy graduates entering the workforce, with the average student loan debt reaching $123,063 in 2012.1 The critical question that prospective student pharmacists must ask is whether future salaries will be sufficient to provide the necessary return on investment for their pharmacy education. 

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

An LPL financial advisor, Benjamin S. Barnhart works with clients around the country, concentrating on comprehensive retirement planning, portfolio management, and tax planning.


Reference
1. American Association of Colleges of Pharmacy. Pharmacy graduating student survey summary report 2012. http://www.aacp.org/resources/research/institutionalresearch/Documents/2012_GSS_final%20summary%20report_all%20schools_105_with%20charts.pdf.
 


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