Dr. Richard Goebel, October 16, 2005

Educational debt has been growing faster than starting salaries. What are the implications for those entering veterinary practice and for their employers. Tonight we plan to discuss the implications for significant debt for borrowers before graduation and after graduation, and implications for employers of new graduates with significant educational debt.

Let‘s first look at implications for the borrower. As background, let‘s look at recent data.

How much debt?
A recent (October 1) JAVMA article reports that 65% of new graduates took jobs in private practice and that base salaries at $51,416 were up 3.6% over 2004. Mean debt for the 88.4% who had debt was $88,077, an increase of 9.6% over 2004. Once again, the rate of debt increase exceeded the rate of salary increase.

Slide #1

According to the Megastudy*, associate veterinarians spent 9% of their income on educational debt in 1985. In 1995, it increased to 12.1%. By 2005, this has now increased to 22% of base salary or 19.3% of total salary after cash bonuses are included.

Slide #2

Clearly the amount of educational debt is a factor in negotiating appropriate salaries for recent graduates. Key factors in reducing debt are often related to the extent of help received from family and friends as well as in-state vs. out-of-state fee and tuition status. For example, at Purdue University, out-of-state students typically have 50% more educational debt than do in-state students.

Question for participants. For additional background, please tell me whether you are:
A student borrower
A recent graduate with significant educational debt
An employer of associate(s) with significant educational debt
An interest participant that doesn‘t fit into these categories

Thank you for allowing yourself to be categorized. : )

Action before graduation

Now, let‘s take a look at specific steps veterinary student borrowers can take to minimize borrowing and spending.

The first step involves a tool called a spending budget. There are two business axioms come to mind:
1.”What gets measured gets done
2.”If you can‘t measure it, you can‘t manage it

The only way to assure discipline that is effective in controlling excessive borrowing and spending is to measure the activity regularly. If you know exactly where the money is going you can take steps to limit spending in non-critical areas.

This tool is too rarely used, but is very valuable to those who use it. Budget formats can be found online at the resources listed below.

The second consideration is to work for income as well as experience. Volunteering is noble, but it does not help your financial situation. While volunteer work may have been essential to accumulating hours needed for the admissions process, the pressure is gone once you are admitted to veterinary school.

Work during school or summer breaks should be for reasonable pay so that borrowing may be diminished. If you also get good experience, that is a bonus. Work that does not necessarily involve veterinary medicine can be educational and useful in your career if it relates to customer service, organizational systems or human resource management, working with a team, or being involved in private business operations.

The third consideration is to avoid/minimize use of credit cards — predatory practices are increasing. It is far too easy to be entrapped by credit card offers and methods.

Credit cards are for convenience and short term borrowing. As a matter of principle, credit cards should not be used for expenses that cannot be retired at the end of a month‘s worth of spending.

Credit card rates are often too high to be considered for use in paying fees and tuition.
Credit card use is so convenient, it encourages impulsive spending. The effects of undisciplined spending can be illustrated in the following example:

Spending an extra $10 per day translates to added debt of nearly $15,000 and added repayment of $161 per month!

Low interest and no fee credit cards may be found at .

For the sports minded: Play defense in your personal financial situation. When you start making a professional salary, you can go on the offensive!

Another way to look at minimizing borrowing is to think damage control.

The fourth step to minimize the effects of educational costs is to utilize available tax breaks. Under certain conditions, you may:

1.Deduct >$4,000 in educational interest expense
2.Utilize the Hope Credit benefit
3.Utilize the Lifetime Learning Credit benefits

And finally, just before graduation, consider consolidation of loans and extend payments over 30 years! Fritz Wood, CPA, CFP, an accountant and certified financial planner well known to our profession described the benefits of this approach in the June, 2003 volume of Veterinary Economics. His illustration using interest rates applicable at the time of publication:

Consider real cost* of student loans:
Base interest rate4.06%
Lock-in during 6-mo grace period 0.60%
Electronic pmt./auto. Withdrawal 0.25%
48 consecutive on-time pmts. 2.00%
Estimated annual inflation 2.00%
Equals: Real interest rate(0.79) %

If we were to illustrate Fritz Wood‘s example using current debt and current interest rates being charged for subsidized loans, it might look like this:

Educational debt of $88.1K (assumes 5.3% interest)

10 year pay-off:$11.4K/yr.
19% of 1st yr. salary

30 year pay-off: $5.9K/yr.
10% of 1st yr. salary

Caution #1: loan consolidation can occur only once. Make sure the timing and terms are optimal for your situation, as you cannot consolidate again.

Caution #2: Non-subsidized loans (8-13% or more) cost much more than subsidized loans (currently 5.3%). Make every attempt to finance your education within the borrowing limits of subsidized loans.

Question for participants: So let me know what you are thinking. What have you done/or did you do prior to graduation to minimize spending and borrowing? I‘m looking for additional ideas as well as refinement of the suggestions listed. Your thoughts?
Action after graduation

OK, now we have graduated with debt and need to consider how we will best service this debt. It can affect our career choices. If we were to look at career options with $$$$ in mind, what would we find?

1) Non-practice careers:
Academic$97K Average
Industrial positions$132K Average

2) Boarded specialties (surgeon, ophtho, etc.)
Private practice salaries in excess of $100K

3) Emergency veterinarians start at a premium, often 20% higher than daytime colleagues
4) Food animal consultancy practice and certain equine positions. Food animal consultants who are highly competent enjoy six figure incomes. Equine positions often start lower than others entering practice, but “catch up within a few years and often surpass other practice salaries.

5) Buy a (financially successful) practice
After 2-3 years of work experience
Educational debt is NOT a barrier if the practice being purchased has healthy cash flow.
50% of current practices for sale will pay a new owner $100K or more in their first year of ownership (after debt service of new practice loan).

6) Military careers and student loan retirement. Quotes from Fritz Wood‘s article in the June 03 issue of Vet Econ summarizes this option nicely.

“U.S. Army offers up to $65,000 in repayment assistance for a four-year enlistment in a selected skill in the active army.*
“Army Reserve offers up to $20,000.*
“For more information, contact a recruiting officer.*
Average salary (‘03) was $87K

*See Cover Story, Vet Econ, 6-03, F. Wood, CPA,CFP

Question for participants: What action(s) did you take after graduation to either increase personal income or retire debt? Have I overlooked obvious alternatives? Your thoughts?

Implications for the employer

“Educational debt is not my problem!

This declaration has been sounded more than once and by more than one practice owner. However, the reality is that the basic cost of living by most recent graduates is pretty similar, variations in regional CPI accepted. A key difference in personal budgets among recent graduates is directly related to their level of debt and their current payment schedule.

Theoretically, a student who had significant financial help from family and friends can work for a lower salary than one of her colleagues who had less help. Borrowing decisions that went beyond federally subsidized loans cloud this issue as well. Non-subsidized loans charge higher interest rates. They may not be consolidated with subsidized loans. The financial need for educational debt repayment varies from no obligation to obligations to service debt of well over $100K. It DOES make a difference in salary required as an entry level associate.

Your associate candidate may have to refuse your offer if they cannot afford to live on the salary you provide even if it exceeds the national average salary by 10% or more. The financial realities of the recent graduate DO drive their salary requirements.

As an employer, you must be more certain that your new associate is a good fit in the practice and likely to stay for several years. In this way, you can recoup your initial year‘s investment and realize profitability once good production numbers are established. Keys to successful hiring require more employer skills in human resource management, coaching and mentoring.

I have seen some employers negotiate an initial contract for two years, rather than one. This helps assure a return on investment for the early months when the associate is more of a financial liability than an asset. By staying two full years, a departure by the associate would be less harmful to the practice than a departure after only one year. Of course, long term employment is usually the intent of both parties to the employment agreement.

Question for participants. Any experience you‘d care to share or unique ideas to consider when employing an associate with significant educational debt?

Rising educational indebtedness affects all phases of our profession. I trust that this discussion has revealed some tools that will be helpful to all stakeholders in the private practice-associate veterinarian relationship.
*Megastudy: The Current and Future Market for Veterinarians and Veterinary Medical Services in the United States, Executive Summary, May, 1999, John P. Brown, PhD, and Jon D. Silverman, PhD, KPMG LLP Economic Consulting Services.

For the entire transcript visit: Managing Educational Debt

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