Not your parents’ student loans

One of the challenges for students as they take on student loan debt is the lack of education about student loans for someone in college in the 21st Century.  Parents of college students today brush off student debt for two main reasons: college was much cheaper in the 1980’s and any student loans you did take were at an incredibly low interest rate compared to the loan on a house or car.  I’ve heard many educated professionals from previous generations make comments like “Student debt is the best debt you can have because the interest is so low.”  Why not max out student loans when the interest is so “cheap” for the student? These comments were valid years ago, but students today face a different situation.  When I was born in 1984 the Federal Prime Lending Rate, the index that most lenders use to establish prices for different types of loans, was 12%.  While this sounds high, the peak was even worse at 21.5% in December of 1980.  When I started college the early 2000’s, the Prime Rate was at 4.25%, just a fraction of what my parents knew as young adults.[1]

1980

This historical perspective is important when discussing student loan interest rates, because many students look to their parents for financial advice.  The frame of reference in the 1980’s for student loan interest compared to the interest on a loan to buy a car or a house made student loans look like “free money” to the savvy financial person.  Now many new graduates can get a home mortgage with lower interest rate than the rate of their federally supported student loan.  The case for “low interest” student loans only applies to special loans that are subsidized and are typically limited.

The student loan story gets worse for the student pharmacist who is considered a “professional” student.  Student loans for graduate and professional students actually have higher interest rates than student loans for undergraduates.[2]  For example, my classmates who took Direct PLUS Loans (for graduate and professional students) between 2006 and 2013 saw interest rates of 7.9%.  When I graduated and bought my first house, my interest rate for the mortgage was 4.25%.  Go figure.


[1] Prime Interest Rate History. Accessed at http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm on Nov 6, 2013.

[2] Interest Rate table for Federal Direct student loans. Accessed at http://studentaid.ed.gov/About/announcements/interest-rate on Nov 5, 2013.

Joey
Joey Mattingly, PharmD, MBA is an assistant professor at the University of Maryland School of Pharmacy located in Baltimore, Maryland. Joey has managed retail and long-term care pharmacy operations in Kentucky, Illinois and Indiana. Leading Over The Counter is a blog of Joey's views and opinions on the topics of pharmacy leadership and management and do not represent the University of Maryland, Baltimore. Joey can be followed on Twitter @joeymattingly.

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