Higher debt, lower salaries a continuing concern for grads

The Great Recession is now history, officially at least, after lasting from December 2007 through June 2009. It was the longest since the Great Depression, and although the economy is showing signs of recovery, the impact of the economic downturn can still be felt in the U.S. and around the world. The veterinary profession has not gone unscathed. The number of patient visits has dropped, and clients—particularly those who are unemployed or have lower incomes—were less likely than other pet owners to have taken their pet to a veterinary clinic in the past year. Arguably, however, those in the profession most affected by the downturn have been veterinary students and recent graduates.

Figures from the 2011 AVMA annual survey of graduating veterinary students (JAVMA 2011;239:953-957) tell the story of what has happened over the past three years. Only 74.3 percent of final-year students said that, as of the time of the survey, they had received at least one job offer or offer for a position in advanced education in 2011. This was down from 2010, when 78.9 percent had received offers and from 2009, when 79.5 percent had received offers. Notably, the percentage of students who said they had received four or more offers has decreased dramatically in the past 10 years, from 23.5 percent in 2001 to 4.8 percent in 2011.

Meanwhile, mean full-time starting salary for 2011 graduates—not including graduates pursuing advanced education—was $66,469, which was down 1.3 percent from the value for 2010 graduates ($67,359) and up only 2.5 percent from the value for 2009 graduates ($64,826).

The study also showed that for the approximately 90 percent of veterinary school graduates with debt, mean student debt increased from 2010 to 2011. Mean debt for 2011 graduates with debt was $142,613, a 6.5 percent increase from the value for 2010 graduates. Mean debt for 2009 graduates with debt was $129,216.

If these trends continue, the likely consequences for the veterinary profession are troubling. The precarious financial situation of these newly minted practitioners is already influencing the decisions they make regarding whether they will pursue postdoctoral education, where they will work, and whether they will purchase a practice (see accompanying stories).

"The profession has had its head in the sand regarding the unsustainable trends in educational debt. The students did, too. They didn't want to hear about it. All they thought was 'I have achieved the dream I've had since I was 6 years old.' Now the dream and the reality are conflicting," said Dr. James F. Wilson, a veterinarian and lawyer who teaches veterinary students about personal finance, employment contracts, and career development.

Borrowing becomes the norm

This perfect storm of stagnating salaries and skyrocketing student debt didn't happen overnight, nor is it isolated to veterinary medicine.

The total amount in student loans taken out in 2010 crossed the $100 billion mark for the first time, and in 2011, total loans outstanding exceeded $1 trillion for the first time. Americans now owe more on student loans than on credit cards, according to the Federal Reserve Bank of New York and the U.S. Department of Education.

Today, students are borrowing twice what they did a decade ago, after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years.

Of course, it wasn't always like this.

After World War II, the U.S. government invested heavily in education, with universities receiving sizeable subsidies and students benefiting from scholarships such as those afforded by the GI Bill. All that started to change around the early 1970s.

By then, a gap had already become apparent between availability of federal aid and access to institutions, and tuition began to rise steadily.

Since that time, there's been a gradual, steady decline in both state and federal funding for education on a per capita basis, especially at the state level.

"The states go through feast/famine cycles, and during recessions and for a few years afterward, state income tax revenue goes down," said Mark Kantrowitz, publisher of Fastweb.com and FinAid.org. "State legislatures have to balance their budgets, so the first place they cut is the support of higher education. They cut both appropriations to colleges and direct grants to students. When they cut state appropriations, state colleges have to make up for that lost revenue elsewhere, typically through tuition increases."

The ongoing declines in state spending are partially responsible for the shift toward loans and away from grants that has continued to this day.

The federal government has contributed to this trend in that it has shifted from providing an equal balance of loans and grants to providing mostly loans, a less expensive form of government aid, Kantrowitz said.

This situation was palatable to students during the past decade as prevailing interest rates declined, triggering successive historic lows in federal education loan interest rates.

Rates for student loans guaranteed by the federal government went from 7.59 percent in 2000-2001 to 5.39 in 2001-2002 to as low as 2.77 in 2004-2005.

"The graduates had this bonanza opportunity to consolidate their loans. They went from more than 7 percent to less than 3 percent, so nobody cared much about educational debt anymore, because the rates were so low they could finance their debt for darn near nothing," Dr. Wilson said.

But by mid-2006, rates had jumped to 6.8 percent and higher. By 2007, government officials realized that many students couldn't pay back their loans within 10 years, and Congress passed the College Cost Reduction and Access Act of 2007. The legislation added the Income-Based Repayment plan, which allowed students to repay their loans with maximum required payments of 15 percent of their discretionary income, forgiving whatever was left after 25 years.

Then came the Great Recession, which caused the situation to go from bad to worse.

In 2011, percentage increases in tuition reached the double digits in some states, including Arizona, Florida, Illinois, and Pennsylvania. California increased tuition at its public institutions by 32 percent in 2010 and by another 20 percent in 2011.

The IBR program has been modified since 2007 (see sidebar), but Dr. Wilson calls these efforts little more than Band-Aids that essentially take the pressure off schools to figure out how to control the cost of education.

Recent trends in veterinary student debt and employment

Blue bars: Mean educational debt among graduates with debt
Red bars: Mean starting salary (including graduates pursuing advanced education)
Green bars: Mean starting salary (excluding graduates pursuing advanced education)

Truth and consequences

So how is the veterinary profession affected by all this?

Veterinary schools and colleges have been forced to lay off hundreds of staff members, reduce the number of faculty members, and eliminate programs because of reduced government funding. To compensate for these losses, governing boards and colleges and universities have increased tuition and encouraged increased enrollments.

Historical data from the Association of American Veterinary Medical Colleges on the amount of student debt, reductions in funding to member institutions, and tuition increases were scheduled, at press time, to be released in mid-January during AAVMC meetings on the economic situation of member institutions.

A quick look at tuition rates at the veterinary schools and colleges for the 2010-2011 and 2011-2012 academic years shows that mean out-of-state tuition increased from $40,124 to $42,747 (6.5 percent), and mean in-state tuition increased from $21,163 to $22,935 (8.4 percent).

Unfortunately, although tuition increases have helped stem the tide of decreased school funding, they have also contributed to the increase in student debt load.

"We're in a miserable, Catch-22 situation. If the schools are transparent and educate applicants regarding the cost of their veterinary school education and relatively poor economic return on the DVM degree, they will discourage applicants," Dr. Wilson said.

"The law schools of this country did not do that. The result has been that they have accepted way more students than there were jobs, so now, some of the law schools are being sued by their graduates for misleading them with data about jobs when many graduates were working but not in a job where they were using their JD degree."

He expects starting salaries for veterinarians to remain stagnant for the near future as the economy remains sluggish, and for debt to continue to increase as veterinary schools and colleges continue to raise tuition.

Kantrowitz said this kind of situation—with debt at graduation increasing at a greater rate than starting salaries—will cause students to turn to longer loan terms, shift to lower-cost schools, default on their loans, or struggle to repay their debt.

Anecdotally, it appears many recent graduates have managed by making the minimum payments on their loan balances, not putting away money for retirement or savings, and putting off major purchases such as a home.

Yet, Kantrowitz remains optimistic about the veterinary profession. Thanks to the unwavering demand for veterinary health care and the high degree of skill required for practitioners, relatively well-paying jobs will always be available for graduates. Whether the profession will continue to be open to everyone, however, has come into question.

"We're facing a continuation of a long-term trend toward decreased college affordability, and it's getting much worse. It's much more severe than any point in the past. We're increasingly pricing low- and moderate-income students out of a college education," Kantrowitz said.

Courses of action

The clear need for action has caused the AVMA to ramp up efforts to address the financial problems of veterinary students and recent graduates.

An AVMA Economic Summit was planned at press time for Jan. 15 in Orlando in conjunction with the North American Veterinary Conference. The meeting of AVMA Executive Board members and veterinary college deans was intended to help the groups address the need for changes in veterinary education and improve economic conditions within the veterinary profession.

Meanwhile, in 2011, the AVMA Executive Board approved moving forward with a U.S. veterinary workforce study that will gather information on the available supply of veterinarians by spring 2012 and generate new information on the demand for companion animal veterinary services. Also this past year, the board approved the creation of an AVMA Veterinary Economics Division. The division is expected to work with the newly formed Veterinary Economics Strategy Committee to develop and manage programs that will, for example, examine the economic effects of AVMA policies, issues, and strategies. Committee members were appointed in early January. A division director was expected to be hired that month.

The Student AVMA has also taken action to help members. In July, the SAVMA House of Delegates created the Task Force on Economic Issues, and charged it to take a deeper look at economic issues of concern to veterinary students today and to make sure the students' point of view is communicated.

The task force responded by sending out a survey to veterinary students this past November to gauge their knowledge about issues such as student debt and financial literacy. They were asked questions such as "Are you aware of how much debt you are in, and if so, how much?" and "Does your school provide financial aid education?" The goal is to gain a better idea of where SAVMA could provide assistance to students and a greater understanding of their economic situations.

SAVMA President Joseph M. Esch said they received more than 3,000 responses, which the task force has been sifting through.

"We hear a lot about what students supposedly know," said Esch, noting that administrators say they do offer financial education. "The questions that still arise are: Do students know that? Do they know these resources exist?" Esch said. "If the students were to say they're not aware of the resources, then that's an area for improvement, and we need to educate students as well."

A final report will be completed in time for the SAVMA HOD session March 14-17 at Purdue University during the annual SAVMA Symposium. Esch said the report should include recommendations to the SAVMA HOD on what action to take to help members, who have long been concerned about their debt load, starting salaries, and job prospects.

"The debt situation is nothing new. This has gone on a long time, and, hopefully, we can come up with something to help. We've done a lot of talking. It's time to come up with measurable (goals and outcomes)," Esch said, commending the AVMA for also taking action.

Modest relief coming for some borrowers

By Malinda Larkin

Borrowers may receive some modest help in repaying their student loans starting this year, thanks to two new measures from the federal government.

This past October, President Barack Obama issued an executive order that sped up a law passed by Congress last year altering the Income-Based Repayment plan. The law now allows borrowers to limit loan repayment to 10 percent of their discretionary income, with the remaining balance forgiven in 20 years if they meet certain requirements. That's an improvement from the previous plan's stipulations that borrowers pay back loans at a rate of 15 percent of their discretionary income, with forgiveness after 25 years.

The new plan was supposed to take effect July 1, 2014. The president moved the start date to July 1 of this year.

The administration also wants to allow students who have two types of loans to consolidate them at an interest rate that is up to half a percentage point lower.

Those with federal student loans qualify for the first initiative, if the amount they would pay under IBR is lower than their current payment on eligible loans under a 10-year standard repayment plan. They also must be new borrowers as of 2008, with no loans prior to 2008, and have at least one loan in 2012 or a subsequent year. This means students who have already graduated don't benefit, said Mark Kantrowitz, a national expert on student loans and publisher of FinAid.org, a website with educational-lending information.

Those who have a loan through the Federal Family Education Loan Program and also have a direct loan from the government qualify for the second initiative, a Special Direct Consolidation Loan. Only the borrowers who consolidate through a special procedure can qualify. Those individuals should expect to be contacted by their loan servicer in the first half of this year, Kantrowitz said.

Kantrowitz said many people have overstated the amount of forgiveness that will occur with the Income-Based Repayment plan. For cases in which debt at graduation exceeds the borrower's annual income, then IBR will provide meaningful financial relief, he said.

But realistically, Kantrowitz added, many borrowers who qualify for IBR aren't going to hit the 20- or 25-year forgiveness point, because they will have paid off their debt by then.

"It does reduce the monthly payment, but in some cases where borrowers are perhaps at the edge of eligibility, the payment will be lower, but they aren't going to be so low that it stretches 20 years, rather than maybe 15 or 18 years," Kantrowitz said.

Also, there are ramifications for reducing monthly payments from 15 percent to 10 percent of discretionary income. The less paid now, the more that will be paid overall because of interest accrual and negative amortization with IBR. Plus, the assumption is that current borrowers will earn modest salaries for a long time, that they will be in the IBR plan for 20 years, and that after 20 years they will have a loan balance to be forgiven. Were the loan holder to change jobs and earn a high enough salary, the IBR plan would go out the window, not to mention that the forgiven amount would be considered taxable income.

Kantrowitz said there've been a few attempts by Congress to fix the tax treatment of the 20-/25-year forgiveness, but none has been successful.

"But considering that someone who's getting forgiveness because they have an inability to repay their debt means they're not going to have the ability to pay the tax bill, either," he said, "I'm fairly optimistic at some point Congress will make that forgiveness tax free, because frankly, you can't squeeze blood from a stone."