The Debt Crisis: Has a Veterinary Degree Become a Bad Investment? Part 1 of 2, The Problem
The financial cost of earning a veterinary degree is higher than it has ever been. For most graduating veterinarians this has translated into unprecedented debt-to-income ratios. Not only are unsustainably large amounts of debt harmful to indebted veterinarians themselves, but the impact of a new generation of heavily indebted veterinarians is rippling through the profession and manifesting in many harmful ways, such as contributing to the veterinary mental healthcare crisis, rising cost of veterinary healthcare services, decreasing economic diversity in the profession, and a growing rural veterinary healthcare access crisis.
Debt-to-income ratio (DIR) is an important measure of the serviceability of student loan debt.
Generally, it is not prudent to take on more student loan debt than will translate into a debt-to-income ratio of one (I.e. your total student loan debt principal should not exceed your anticipated annual starting salary). A debt-to-income ratio of one or lower means that the debt interest and principal payments should be comfortably serviced as originally scheduled from your discretionary income without a large deviation in lifestyle. This general guide of keeping a debt-to-income ratio of one or lower isn’t accurate for all people in all situations, as cost of living and lifestyle expectations are going to vary by individual, but it does give us a benchmark to work with that applies in most scenarios.
From 2001 to 2019 the average DIR for veterinary graduates increased from 1.5 to 2.0. That would be problematic on its own, however it doesn’t convey the true gravity of the situation. The proportion of students graduating without any debt (mostly from wealthier backgrounds who were able to fund their own education) increased, blunting the increase indicated by the average. If we isolate only students who graduated with debt, the average DIR for veterinary graduates increased from 1.8 to 2.6 over that span.
In 2019 72% of veterinary graduates had a DIR greater than 1, and 43% had a DIR >2.
Rising DIR is being driven by an increase in the cost of education. Starting salaries for veterinarians have increased in recent years but have not kept pace with the rising cost of education, which is reflected in rising average DIRs.
Over the last decade the average cost of a veterinary degree grew at 2.4 times inflation for nonresident students and 2.1 times inflation for residents at schools which offer in-state tuition subsidy. As is the case with biological systems, financial systems need negative feedback mechanisms to achieve healthy balance.
The cost of veterinary medical education currently lacks negative control.
Imprudent amounts of student loan debt are easily accessible for veterinary medical students, creating little incentive for veterinary medical schools to focus on cost control. In typical lending scenarios (mortgages, business loans, etc) lenders pay close attention to debt-to-income ratio of a borrower and will deny a loan to anyone seeking to lend more money than the lender feels they can reasonably afford to pay off. However, this is not typically the case when it comes to student loans for veterinary medical students, with nearly half of recent veterinary graduates having more than double (DIR >2) the recommended prudent maximum amount of debt. With plentiful applicants who have access to nearly unlimited amounts of debt, and no other meaningful external pressure to control costs, veterinary medical programs have a carte blanche to charge whatever they want for a degree.
The rising cost of education is resulting in a less economically diverse profession. The proportion of veterinarians self-paying their education has increased alongside the average debt-to-income ratio. This likely reflects a hard truth:
The economic value of a veterinary medical degree is plummeting due to the cost of education growing faster than salaries.
With less economic value, the demographics of the young and talented individuals interested in pursuing a veterinary medical degree are shifting toward those of more affluent, less rural backgrounds.
Rising, excessive educational debt among veterinarians unavoidably translates into higher cost of veterinary care for our patients.
As a profession we have an ethical responsibility to ensure that our services are priced appropriately such that they remain accessible to the average responsible pet owner. This means that the veterinary student loan crisis will continue to spiral into a healthcare accessibility crisis unless we intervene soon. While there is seemingly no ceiling on how high veterinary medical tuition will continue to rise, there is a ceiling on what clients can afford to pay for the medical care of their pets. We are already past the breaking point, with many veterinarians are already working for less pay than they can afford on an after-debt basis. These veterinarians forced into a cycle of negative amortization of their debt in income-based repayment plans and must rely on 20- or 25-year federal debt repayment in IBR plans as their only viable path out of debt.
A bleaker financial outlook for veterinary graduates means that becoming a veterinarian is increasingly a privilege of the wealthy rather than a financially viable career.
This is contributing to a growing rural veterinary healthcare crisis for two reasons:
Graduates from non-rural backgrounds are less likely to choose to serve rural communities in practice, especially when there is economic incentive (higher salaries) to work at suburban and urban practices.
Excessive debt eliminates much of the benefit of choosing to live and practice in lower cost of living communities. Debt service represents a large, fixed expense that effectively creates a floor for feasible income for indebted veterinarians, regardless of how low their cost of living is otherwise.
The decline in veterinarian practice ownership is both a cause and an effect of the veterinarian debt crisis.
Fewer veterinarians than ever are considering buying or starting their own practices. In part, this is driven by the significant debt load of most new veterinary graduates. Carrying an already excessive amount of debt makes veterinarians understandably apprehensive about taking on a significant amount of additional debt to become an owner. Debt financing is still an option for most veterinarians who are interested in ownership even if they have a large amount of student loan debt, but it is understandable that the overall appetite for ownership among heavily indebted young veterinarians is not as strong as it used to be. A combination of fewer young veterinarians being interested or able to pursue ownership and the discovery of veterinary medicine by private equity and other investors has resulted in a gap in the market that is being rapidly filled by non-veterinarian owners. Owners looking to exit their practices are finding that individual veterinarian buyers are hard to come by and usually unable to provide valuations competitive with those provided by investment groups. This is problematic, as the average veterinarian owner makes about $200,000 a year more than the average associate veterinarian. While this is just an average and many owners do not have as significant of a compensation gap with their associates, it does raise an important point:
Ownership is one of the few viable methods for indebted veterinarians to effectively pay off their student loan debt.
As I discussed in a previous blog post on the veterinary mental health crisis, heavy indebtedness contributes to poor mental health outcomes. Importantly, it has been demonstrated that it is only excessive amounts of debt that appear to contribute to these poorer mental health outcomes rather than just the existence of any debt at all. The mental health crisis in our profession is multifaceted and fixing one factor won’t make the problem go away on its own, but eliminating excessive student loan debt scenarios for veterinarians would be a step in the right direction.
At Associated Veterinary Partners we’re committed to ensuring healthy, happy, and financially rewarding careers for veterinary healthcare workers. That commitment doesn’t end with our work at our partner practices. We’re also working hard to be thought leaders and doing our part in addressing the larger issues that face our profession.
Tune in next week for our second article in this series where we discuss potential ways that the veterinary profession can address this crisis and what we’re doing at Associated Veterinary Partners to help. Sign up for our mailing list at the bottom of our website if you’d like to receive notification when that article and all of our future blog posts arrive.
1) 2020 AVMA Report on the Economic State of the Veterinary Profession