Before you embark on your pharmacy career, please take a moment to consider your education costs. In case you haven't heard, it is very likely that most of you will graduate with a substantial sum of student loans. When I was in pharmacy school, the tuition was reasonable $17,000/year and the profession was in the height of its boom. Now, that market has changed. I have see some school's tuition to be excess of $40,000 per year and many graduating pharmacists struggle to find work in major metropolitan areas. This is not about arguing the profession's future, but simply, to educate all your pre-pharmacy students to thinking about your personal finances, in which, in turn will lead you to making smart career choices. ______________________________ What is a loan? Simply, a loan is a financial agreement between a lender and a borrower on borrowing money and repaying that money. A borrower borrows money from a lender, and the borrower then repays the lender with interest. Two Major Types of Loans There are two types of loans: secured loans and unsecured loans. The difference between these two loans is the presence of collateral. Secured loans are guaranteed by a collateral. Collateral is an asset or a property that guarantees the loan in an event of default (fail to make payments). If you default on a secured loan, the lender can take possession of the collateral. Therefore, secured loans are lower risk loans and the interest rates are generally lower than the unsecured loans. Some of the examples of secured loans include: mortgages, home equity loans, and car loans. Unsecured loans are not guaranteed by a collateral. A lack of collateral means, the lender is taking on more risk with the unsecured loan than the secured loan. Therefore, the lender will most likely charge higher interest rates and scrutinize your loan application. It also means that you are not likely be approved for an unsecured loan without a solid credit history. An example of an unsecured loan is a personal loan. Now.. student loans are in a unique category. Student loans can be both secured loans or unsecured loans. The federal student loans, subsidized or unsubsidized Stafford Loans are guaranteed by the Federal Government. Therefore, for the lenders, they can be considered secured loans. However, if you go to a private bank and get a private student loan, those loans are not guaranteed by the Federal Government and therefore they are unsecured loans. Loan Structure There are three components that make up a loan: principle, interest rate and term. Principle is the original amount borrowed. As you make payments, the principle amount decreases. Interest is then charged on the remaining principle amount and together they become the remaining loan balance. Interest rate determines the amount of interest you pay on the loan. In the United States, almost all interest rates are expressed as an annual rate. APR, which stands for "Annual Percentage Rate" is the most common way the interest rates are expressed. To fully understand how interest rates work, we must understand the concept of compounding period. Compounding period describes how often interest is applied to the remaining principle amount. For the majority of loans in the United States, the compounding period is a month or 12 times a year. Please recall that an APR is an annual representation of an interest rate. At the start or the end of each compounding period, lenders apply interest at a fraction of annual rate that is determined by dividing the number of compounding period from the annual rate. That fractional rate is called "periodic rate". In order to get the periodic rate, all you have to do is divide the APR by the number of compounding period in a year. For example: A loan with APR of 12% with a monthly compounding period will have a periodic rate of 1% (12% ÷ 12) A loan with APR of 40% with a daily compounding period will have a periodic rate of 0.11% (40% ÷ 365) This will become very important when we calculate loan payments in the later section. Finally, the term of a loan is length of time required to fully satisfy the loan. Most of the consumer loans have 1 to 5 year terms and mortgages have 15 or 30 year terms. One a side note, when we perform loan calculations, the term of a loan equals the total number of compounding period occurred through the life of a loan. How to Calculate Your Loan Payment The easiest way to calculate your loan payments is to use various loan calculators available on the web. If you search "Loan Calculator" in Google, you will find them easily. Or use Excel PMT function. (We will use Excel method in the example below.) Let's do an example. "Jane, a PY4 pharmacy student will be graduating with $200,000 in student loans. The interest rate on her loan is 6.9% APR. The repayment period is over 30 years. What's is her monthly loan payment?" Use Excel "PMT" Function: Using Excel will require you put in some values that are not familiar to you. Here are the comparisons. Rate: Same as we talked about. Make sure you use the decimal value of a percentage. nper (number of periods): total number of payments a.k.a. total number of compounding periods. PV (Present Value): Current value of loan. Equal to the original principle amount. FV (Future Value): Loan's value at the end of the term. The loan has zero value once it is paid off, so FV is "0". Type: This is an optional feature. You can put "0" The Excel Formula for Jane's loan example would look like this: =PMT((0.069/12),360,200000,0,0). One thing you will notice right away is that the formula will return a negative number or a number with parenthesis. It is ok. The negative number represent your money going out. Just get rid of the negative and you will have the payment amount. Answer = $1317.20 per month for 30 years. Student Loan's Impact Let's consider Jane's example. In this market, and depending on which school you choose to attend, it is possible that you will graduate with $200,000 in loans. But, how much are you expected to make? How is that $1317.20 impacts your monthly cashflow? As a graduate pharmacist, it is most likely you will encounter salaries that pays roughly $50.00/hour. Now, that salary is not in set in stone but it is a rough estimate. With that salary, after taxes you are going to take home about $2100 ~ $2300 biweekly, which brings your total monthly available cash to $4200 ~ $4600. After subtracting your student loan payment, that will leave you $3282.80 in the best case scenario. Now, as you live your life, you will most likely have following expenses. Expenses: Housing $1000 Transportation: $400 Phone: $80 Internet + Cable: $120 Living Expenses: $1000 Total Expenses: $2600 Amount of cash left over for discretionary spending: $682.80 Don't let anybody full you. You may be making a six figure salary, but discretionary spending of $682.80 is nothing. The same level of discretionary spending could be achieved by anyone who makes $60,000 per year without $200,000 in student loans. The good news is that you are entering the profession where for the most part, can support the high student loan payment. We are definitely better off than those students who went to an Ivy League school with the same amount of debt, but has only an undergraduate degree to show for it (but there are exceptions). TL : DR Choosing a career in this early in your life is a huge investment and it should not be taken lightly. Before you enter the profession and decided on the school of your choice, please do yourself a favor by evaluating your future income and the cost of school. At the end of the day, education is an investment. If your investment is not returning the life and financial freedom that you sought, then what is the point?