March 1, 2016By Michael Dicks, Ph.D.
The current mean Debt-to-Income Ratio (DIR) is at 2:1 for graduates from the U.S. colleges of veterinary medicine, which has increased over the last fifteen years from less than 1.2:1 in 2001. However, the mean obscures the fact that there is a wide variation in individual DIRs, with roughly 11 percent of graduates having no debt (and thus a 0 DIR) and approximately 8 percent having a DIR in excess of 4:1. Currently, the short-term performance of the veterinary markets has enabled the DIR to hold near 2:1 because student debt did not rise as quickly as expected and salaries increased faster than predicted. However, the longer term trends such as declining state and federal budgets; increasing seats; and an impending economic downturn suggest that the persistent increase in the DIR may continue into the future.
Total debt for the 2015 graduates from the U.S. colleges of veterinary medicine was estimated at $427,502,116. For total cost of tuition and fees the estimate is $382,559,375 with another $240,623,655 in estimated living expenses for a total estimated cost of $623,183,030 for all of the 3,018 U.S. veterinary college graduates in 2015. The interest expense for borrowing these funds adds $81,924,168, bringing the total cost of the education to $705,107,198. However, students applied various outside sources of funds to pay for some or all of these expenses and thus total debt was only 61 percent of this total cost.
The survival of the profession depends on the ability of the colleges of veterinary medicine to produce new veterinarians equipped with the skills necessary to provide the services that are needed by animal owners and the general population. For more than two decades, educational institutions have been under pressure to continually determine how to accomplish this responsibility despite declining contributions from state and federal resources. Until the early 2000s these institutions found ways to trim budgets to offset declining external funding. But the ability to compensate for the steadily increasing reductions in these external costs became extremely difficult in the mid-2000s, and the institutions were compelled to turn to students as a major source of revenue to balance their budgets. Hence, the rapidly increasing tuition and growth in the number of seats, particularly non-discounted (e.g., out of state) seats, that occurred since 2006. Of course this increase in tuition was a primary driver of the increasing DIR.
One of the sources of the increasing DIR is the lack of price transmission between the market for education and the market for veterinarians. In other words, the increasing price of education has not corresponded with an increase in veterinary compensation. Currently, veterinary colleges are only required to provide veterinary professionals that are competent in providing medical services. To counter this, the U.S. Department of Education’s "gainful employment" provision requires specific institutions ensure that their graduates not exceed a specific DIR limit, tying incomes in the market for veterinarians to the costs of education.
The veterinary profession does have control, in whole or in part, of every component in the veterinary markets. Veterinarians control the college admission process, veterinary education and the practices that provide services to animal owners. That last component is often overlooked in discussions about the increasing DIR. While veterinarians have little direct control over the amount of public funding provided for veterinary education, they do have control over how to best use those funds to develop veterinarians that are prepared to provide the services animal owners demand at prices they are willing to pay. In essence, the veterinary profession can affect the performance of the veterinary markets.
There is considerable evidence that the need for veterinary services is quite large in comparison to the amount currently being provided. Reduced consumer disposable income and the growth in veterinary prices at rates above inflation certainly account for part of this lost market. But changing preferences, major components in consumer choice, are also likely to have played a major role and we currently know little about how these consumer tastes and preferences changed in relation to veterinary services.
Growth in the DIR must be stopped quickly and reduced over the longer term to ensure the sustainability of the market for veterinary education, which directly impacts the sustainability of the profession.
If you break down the DIR into its two primary components – debt and income – it seems intuitive that to reduce the DIR you would need to reduce debt and/or increase income.
In both the gainful employment provision described above and a potential scholarship-funding tax on veterinary services, the participants in the market for education and in the market for veterinarians are forced to consider the relationship between the cost of producing veterinarians and the willingness of animal owners to pay for the services provided by those veterinarians.
One option to reduce debt would be for the profession to implement a 0.1 percent tax on all sales and provide these funds to colleges in the form of scholarships to offset the debt of students.
Practice owners can and should be part of the solution towards the reduction of the DIR. Based on current data, a 10 percent increase in starting salaries would reduce the mean DIR from its current 2:1 to 1.8:1. Mean starting salaries for the 2015 graduating class were just over $70,000, and an increase of 10 percent would mean paying starting salaries of $77,000.
The industry standard percentage of production that is returned to the veterinarian as income is roughly 20 percent. If the mean starting salary of graduates is $70,000, an average expected annual gross production of $350,000 for each graduate is needed to support this income. To increase the salary by 10 percent (to $77,000) would require a new graduate being able to generate $385,000 in gross production the first year. Alternatively, each practice that hires one new graduate would need to increase gross practice revenues by roughly $35,000 or 219 average transactions over the current level. Both the veterinary colleges and the practices need to work together to figure out how to improve the production performance of new graduates and pay them accordingly.
Another way to consider this would be to have all practices accepts responsibility for the needed increase in revenue to reduce the DIR and distribute the burden. The total sum needed to reduce the DIR from 2:1 to 1.8 for all U.S. graduates would be $21 million based on current data. Rather than asking only the practices that hire new graduates to be responsible for increasing the demand for their services, all practices would be asked to contribute. The total value of output from the 25,000 to 30,000 veterinary practices in the U.S. is estimated at $22.4 billion. Thus, the increased in revenue necessary to reduce the DIR to 1.8:1 would require approximately a one-tenth of one percent increase in total revenue for each practice. Of course, the question then becomes, how do we collect the money from practices and distribute to the new veterinarians to reduce the DIR?
While there are certainly numerous strategies for the colleges, veterinary college applicants and students, veterinarians and practice owners to reduce the DIR, the key is better communication and cooperation between practices and colleges to improve the ability of new veterinarians to capture previously unmet demand for veterinary services. Without a focus on this area, efforts to reign in the DIR will likely produce only short-term results.
We provide greater detail and opportunities for discussion on this topic in the 2016 AVMA Report of the Market for Education (which will be published in late March) and during the profession-wide debt summit on April 21st and 22nd, 2016 at Michigan State University.