The Impact of Education Cost, Student Debt, and Career Compensation, on an Investment in a Veterinary Medical Degree when Compared to an Alternate Career
Eric (Rick) M. Mills, DVM, PhD, MSW Rick Mills Consulting LLC, 3735 Pleasant View Road, Ames, IA 50014
Kevan P. Flaming DVM, PhD Center for Food Security and Public Health, College of Veterinary Medicine, Iowa State University 50011
Abstract
Objective – To study the impact of the cost of education, student debt, and career compensation on the investment return of a veterinary degree used to work as an employed veterinarian when compared to a hypothetical alternate career.
Design – Net present value model
Procedures – Multiple scenarios for investing in a veterinary degree were compared to a hypothetical alternate career to isolate the additional financial value provided for the additional investment of capital and time. Each scenario was a unique combination of cost of education, amount borrowed, and/or career compensation. Net Present Value (NPV) and the first working year with a positive return were calculated. The NPVs determined in this study are directly determined by the assumptions used as inputs to the model. As such, they are not significant in an absolute sense and should not be used for detailed financial planning or generalized statements as to an absolute value of a veterinary degree. Their value is in quantifying the impact of various changes in the assumptions used in the model. For exploring scenarios that more closely reflect one’s individual circumstances and preferred long-term financial assumptions, an online version of the model is available at http://ReturnOnEducationModel.com.
Results – Sixty-four of 100 scenarios resulted in a positive NPV at the end of a 35-year working career using an alternate career compensation of $40,000, a discount rate of 3%, a borrowing rate of 6%, and a long-term annual investment rate of 5%.
Each $10,000 increase in starting compensation increased career NPVs by $420,388.
Increasing the first-year direct cost of education in increments of $10,000 resulted in lower NPVs, which varied by levels of financing. When financing was 0%, each $10,000 increase in first-year direct cost resulted in a reduction of $151,037 in NPV. As levels of financing increased to 25%, 50%, 75%, and 100%, the amount of reduction in NPV for each $10,000 increase in first-year direct cost decreased to $127,079; $103,121; $79,162; and $55,204 respectively.
Conclusions – Securing the future of the veterinary profession must include securing the financial future of employed veterinarians and their families. If the cost of acquiring a veterinary degree continues to rise, and compensations for alternate careers increase, the profession will become less financially competitive in attracting qualified students. Either the cost of education to students must decrease, or career compensations must increase to provide an acceptable return on the financial investment. A One Health worldview must include the financial health of the profession’s most vulnerable members.
Abbreviations – NPV Net Present Value
Introduction
The future of the veterinary profession is inextricably linked to the quality of life made possible for its new graduates and employed veterinarians. While quality of life, both personal and professional, can be measured according to many criteria such as personal satisfaction and service to others, one measure that should not be ignored is financial quality of life, as it can enable, limit, or even eliminate other personal and professional opportunities. Unfortunately, the financial quality of life for many current and future veterinarians is threatened by a growing imbalance between the personal cost of acquiring a veterinary medical degree and current levels of compensation. This imbalance not only reduces the financial return that employed veterinarians can expect to receive from their investment in a veterinary degree, it may limit their capacity to assume additional debt to purchase equity in a veterinary practice if they cannot remain current on their student loans. Therefore, it is critical that members of the veterinary profession understand the financial impact that investing in a veterinary degree can have on students; and that new graduates understand the level of productivity that is required to earn a positive financial return on their investment.
Background
When a person is deciding whether or not to pursue a veterinary degree, that individual is likely considering several colleges of veterinary medicine, and may even be considering other career options. Each career path will require a unique investment of time and capital, and that investment will result in a particular financial return. While accurately predicting the exact financial return of such a complex investment is not possible, broad trends and the potential outcomes of various institutional and personal interventions can be identified.
This paper describes a model for exploring the difference in financial return among various scenarios for investing in a veterinary degree to work as a private practice associate. These scenarios are compared using a hypothetical alternate career that does not require additional training. Each scenario varies in a) the financial cost of acquiring a veterinary degree, b) the percentage of that cost that is financed, and c) the compensation that will be received. The model estimates the financial return of each scenario by calculating the Net Present Value (NPV) on projected career cash flows when compared to the alternate career. In addition, the model estimates the number of years an associate veterinarian would need to work in each scenario to receive the first positive financial return on that investment.
The model proposed in this paper is not meant to be used in its current form as a personal financial calculator for detailed long-term planning. However, it is offered as a tool to study broad trends, and to explore potential impacts of various organizational and personal interventions. Potential enhancements and additional uses of the model are discussed in the section on Future Work. What follows is a brief overview of the NPV calculation and how it is applied using an alternate career approach.
Net Present Value
Net Present Value (NPV) is the value today of a series of cash flows over time and is reported in dollars. These cash flows can represent past financial activity or activity that is projected to occur. The cash flows used to calculate NPV can be all positive or negative, or a mix of positive and negative values that are consecutive or interspersed.
A typical approach to calculating the NPV of a veterinary degree when compared to other careers would be to first calculate the NPV of a veterinary degree using the projected costs of acquiring the degree and the projected income received after graduation. The veterinary NPV would then be compared to an NPV calculated in the same manner on the projected cash flow of an alternate career.
Alternate Career Approach
This study diverges from the typical use of the NPV calculation for evaluating investments in that it does not attempt to calculate a single independent value for an investment in a veterinary degree. Instead, this study uses NPV to determine the difference in the financial return of various scenarios for acquiring a veterinary degree when each is compared to the same hypothetical alternate career that does not require additional post-undergraduate training. This approach isolates the additional return on the additional investment in a veterinary degree over and above that received from an undergraduate education. It also provides a means for isolating the impacts of changes in cost of education, percent of that cost borrowed, and compensation as an employed veterinarian.
The reasons for an alternate career approach are three-fold. The first is that no set of assumptions can be used to accurately determine a single value of a veterinary degree to a broad range of graduates since costs of acquiring a veterinary degree vary widely, as does borrowing and total compensation from working as an employed veterinarian. To address this variability, the alternate career approach helps identify the relative financial value of an investment in a veterinary degree when compared to what would have been received from an alternate career. For example, if two people make the same investment in a veterinary degree, the one whose alternate career would have generated the lowest total compensation of the two individuals receives a higher relative return from the investment. The second reason is that for future studies on the financial competitiveness of a career in veterinary medicine, the parameters of the alternate career can be adjusted to reflect careers that recruit students of similar ability as those who apply to veterinary school. The third reason is that organizations considering potential interventions can use the model along with institution-specific parameters to gauge the impact of those actions in light of alternate careers that are viable for their future student populations.
Since the NPVs determined in this study are in comparison to a hypothetical alternate career, the level of total compensation chosen for the alternate career directly influences their values. As such, these NPVs are meaningful only in the context of the alternate career and are not meaningful in an absolute sense for establishing a single industry-wide value of a veterinary degree, or for predicting the actual cash on hand at the end of one’s career. However, it is proposed in this study that when the total compensation for the alternate career is held constant, changes in the NPV calculation are reliable measures for comparing the relative financial outcome of various scenarios for acquiring a veterinary degree.
Discount Rate for Net Present Value
One might be tempted to use the nominal value of dollars (the actual amounts) invested and received each year during one’s veterinary training and working career to calculate a profit or loss, but this would not account for the declining value of dollars over time. For example, if one receives $1,000 each year for 39 years, the purchasing power or value of the $1,000 received in year 39 would be considerably less than the $1,000 received in the first year. In order to account for this decline in value over time, the NPV calculation uses a discount rate that is a percentage by which the nominal value of dollars invested and received in the future is adjusted downward (discounted) to reflect their decrease in value relative to the value of dollars received in the first year. For example, a discount rate of 5% means that the $1,000 received in the second year would be equivalent to $952.38 of value ($1,000/1.05) when compared to $1,000 received in the first year. In the same way, $1,000 received in the third year is reduced by an additional 5% ($1,000/1.05/1.05) because it was received two years from the first year. Therefore, $1,000 in the third year would have a NPV of $907.03 when compared to the value of first year dollars. Returning to the example of receiving $1,000 each year for 39 years with a discount rate of 5%, receiving $17,867.89 as a one-time payment in the first year would have the same NPV as receiving $1,000 every year for 39 years.
In general, the choice of a discount rate depends on the particular requirements of an investor as it can be used to adjust for several factors individually or in combination. One use is to adjust for general inflation over the time-period of an investment and therefore a discount rate would be chosen that is the assumed average inflation rate over that period. Another use would be for a business that plans to borrow all of the necessary funds for an investment. Assuming the business could borrow funds at 7% interest for the length of the investment, the business might only consider projects that still generated a positive cash flow (profit) with a 7% discount rate. Since higher discount rates result in a greater reduction in the value of projected cash flows over time, some businesses choose a higher discount rate when calculating the NPV of a potential investment to ensure that the investment is still profitable at that higher threshold.
When considering an investment in a veterinary degree, individuals must weigh their own opportunity costs to determine if it is profitable both personally and financially. Job satisfaction and quality of life should be considered in addition to the financial return. The model in this study provides a way to identify broad trends in the financial component of this decision.
Materials and Methods
The scenarios in this study varied according to 14 parameters listed by category in Table 1. The four categories are 1) the direct cost of obtaining a veterinary degree (cash outflow), 2) the debt-related expense for obtaining the degree (cash outflow), 3) total compensation from working as an employed veterinarian (cash inflow), and 4) foregone income from the alternate career (cash outflow).
The parameters of each category were used to calculate the annual inflows and outflows of cash to the veterinarian, first as a student in training and then during employment. Borrowed funds are not counted as cash inflows in this model because it is assumed they are immediately offset when dispersed to the degree granting institution or for living expenses during training. Repayment of those funds is treated as a cash outflow that is in return for the financial value of the education received, which is what results from working as an employed veterinarian.
Category four, foregone income from the alternate career is treated as an outflow of cash even though it is not a borrowed or paid direct expense because it is income that will not be received when one chooses the veterinary career. In essence, it is an opportunity cost (loss) that occurs as a result of choosing the veterinary career. For example, if one is offered $40,000 to work for a year at a particular job but chooses to do volunteer service at a personal cost of $10,000, at the end of one year that individual incurs a net negative difference of $50,000. Even though the actual dollar cost is $10,000, the opportunity to earn $40,000 and retain $10,000 in personal funds was no longer possible. As a result, that person would need to receive $50,000 to be restored to the same financial state as someone else who had accepted the $40,000 job rather than choosing to do volunteer service. Each input parameter is described more fully in the text that follows. To assist those who want to explore scenarios not presented in this study or use a different set of assumption, an interactive version of the model is available at http://www.ReturnOnEducationModel.com.
Direct cost of obtaining a veterinary degree (tuition, books, fees, and equipment) was examined at four levels with beginning first-year direct costs of education of $15,000, $25,000, $35,000, and $45,000. Each first-year direct cost was increased by 4% a year for a total of four years of training.
Debt-related expense was examined at five levels, which were 0%, 25%, 50%, 75%, and 100% of the combined direct cost of education, interest on borrowed direct costs, and interest on borrowed living expenses for each of the four years of training. Living expenses for the first year of training were fixed at $14,000 and then increased by 2% each year for four years. Borrowed direct costs, interest on borrowed direct costs, and interest on borrowed living expenses were capitalized into a total loan at a fixed rate of 6% per year with annual payments made during a repayment period of 15 years beginning the first year after graduation. It was assumed that actual living expenses were equally incurred by both career choices and therefore were offsetting.
Undergraduate debt is not included in this model because it represents a separate prior investment that results in the total compensation return of the alternate career, and is not directly related to the additional investment and return of a veterinary degree.
Income from working as an employed veterinarian is the total annual compensation of salary and benefits, and was examined at five first-year starting levels of $45,000, $55,000, $65,000, $75,000 and $85,000 for each scenario, which reflects a recently reported range.1
Annual increases in compensation were derived from 2009 professional incomes of private practice associates that were reported by years since graduation.2 While future income of private practice associates cannot be predicted, it was assumed that the percentage differences based on years of practice reflect a relative difference in value and are a reasonable basis for estimating future annual percentage changes.
Mean incomes for years since graduation were $74,093 (1 to 2 years); $88,310 (3 to 4 years); $94,016 (5 to 9 years); $90,489 (10 to 14 years); $93,165 (15 to 19 years); $102,010 (20 to 24 years); and $99,234 (25 years or more). Annual percentage increases within brackets were calculated to fit the curve of these reported incomes. Mean starting salaries of private practice associates were used to determine annual percentage increases. ($58,106 for 2007 graduates3 and $61,518 for 2008 graduates4. Using the 2007 starting salary resulted in a 14% first year raise, while using the 2008 starting salary resulted in an 8% first year raise. Since the first bracket of the reported incomes was (1 to 2 years), an average of 11% was used for the first year percentage increase. The resulting increases for years one, two, three, four and five of employment were 11%, 24%, 4%, 7%, and 2% respectively. Changes for the remaining years varied between -2% and 2% to fit the reported mean incomes for the remaining years. These data indicate an initial increase in income based on increasing years in practice followed by a leveling in the fifth year of employment with relatively minor annual variations (-2% to 2%) thereafter. Since the annual increases leading up to each subsequent year of employment are unknown, this study used an estimation of annual increases of 11%, 24%, 7%, 5% and 3% each year thereafter. The same increases were used beginning with the first year of employment in the alternate career.
Taxes on income for the veterinary and alternate careers were not considered because individual circumstances vary widely, and this version of the model is not intended for personal financial planning to that level of detail.
Foregone income from the alternate career consisted of two sources. The first was direct compensation, which is the total salary and benefits that would have been received from working in the alternate career. This compensation was set at $40,000 for the first year and then increased by the same annual percentages as those used for the veterinary career.
The second source of foregone income is interest on personal funds that would have been received during the alternate career had they not been used to obtain a veterinary degree. This amount is calculated on the percentage of the direct cost of education that was not borrowed. The interest rate for these funds had they been invested for 39 years was set at 5%. For example, if no funds were borrowed, meaning that all expenses were paid from personal funds, the foregone interest on those personal funds was calculated at 5% on 100% of the direct cost of education. If the level of financing was 75% then foregone interest was calculated on 25% of those costs. Finally, if 100% of the costs to acquire a veterinary degree were financed, meaning that no personal funds were used, there was no foregone interest income.
Calculating Net Present Value
For each scenario, annual cash flows were projected to 39 years for both the veterinary career (training and working) and the alternate career. The net difference in cash flow between the veterinary career and the alternate career was determined for each of the 39 years, with the result being a series of negative values followed by a series of positive values. Years during the training period consisted only of cash outflows from the perspective of the veterinary career (invested funds). Cash inflows began immediately upon graduation with employment as an associate veterinarian. The formula for calculating the net cash flow to the veterinary career for each year in a scenario was:
Net Annual Cash Flow = Veterinary Total Compensation – Direct Education Costs Not Borrowed – Alternate Career Total Compensation – Education Loan Payment – Foregone Interest on Personal Funds
NPVs were calculated using Microsoft Excel (2007) with a discount rate of 3%, which is consistent with that used by Gordon, Lloyd, and Harris-Kober.5
What follows is a step-by-step example of how the cash flow for each year of a scenario was determined. This example assumes a first-year direct cost of education to be $25,000, a starting compensation of $65,000 with annual increases of 11%, 24%, 7%, 5% and 3% thereafter, and the percentage of financing set at 50%, of which repayment is amortized over 15 years with the first annualized payment beginning at the end of the first year of employment. The discount rate is 3% and the investment rate is 5%. To simplify this example, nominal dollar values are used rather than discounted values.
During the first four years of training when compensation as a veterinarian is not received, all cash flows are negative. While the four-year direct cost of education is $106,161, which is based on a $25,000 first-year cost with 4% increases each year, only the portion not borrowed ($53,081 that is paid from personal funds) is counted as a cash outflow. Foregone income from the alternate career is $198,365, which is based on a starting total compensation of $40,000 per year with increases of 11%, 24%, 7%, 5%, and 3% thereafter to maintain parity with annual increases in the veterinary career, though this is not a requirement. In addition, foregone interest income during the four years is $6,830. Therefore, the NPV upon graduation is based on the financial difference between the veterinary and alternate career, which is a negative $246,077. Since the portion of borrowed tuition ($53,081) and interest on borrowed tuition and living expenses ($12,825) are repaid during the loan repayment period, they are accounted for in the cash flow during those years. However, if one views these values as commitments made during the first four years, the net difference in nominal dollars at the end of four years is a negative $324,181.
In year five of this example, employment for the veterinarian begins and a total compensation of $65,000 is received, which is $3,146 more than what would have been received from working in the alternate career in that same year. In addition, foregone interest income is $2,994. Also in year five, education costs are $0 and remain so from then on, and the first annualized loan payment of $8,516 is due, which results in a net negative cash flow of $8,364. Recall that this negative cash flow is used solely to calculate the NPV when compared to the alternate career. The veterinarian’s actual gross income after the first loan payment for year five in this example is $56,484.a During years six, seven, eight, and nine, the veterinarian receives increases in compensation of 11%, 24%, 7%, and 5%, which result in annual compensations of $72,150; $89,466; $95,729 and $100,515 respectively. During this same period, the annual compensations from the alternate career are $63,710; $65,620; $67,589; and $69,616 respectively. The initial increases that are just now influencing the veterinary compensation have already been applied in the alternate career beginning with its first annual increase.
Results
These results report NPVs for 100 scenarios that vary in cost of education, total starting compensation, and percent of training costs that are borrowed. Also reported, is the first working year of each scenario in which the veterinarian receives a positive financial return in excess of that which would have been received in the alternate career. Of the 100 scenarios, 64 resulted in a positive NPV, which indicated a positive financial return on the investment in a veterinary degree when compared to the alternate career. All NPVs were negative for scenarios with a starting total compensation of $45,000, 15 were negative for $55,000, and only 1 was negative for a starting total compensation of $65,000. All starting total compensations of $75,000 and $85,000 resulted in a positive NPV. These results are summarized in Table 2.
The highest NPV as shown in Table 2 is $1,343,646, which was the result of using $15,000 for the first-year direct cost of education, 100% financing, and a starting total compensation of $85,000. The NPV for this scenario first turned positive in the seventh year of work as also shown in Table 2. As levels of financing in this scenario were decreased to 0%, the NPV decreased to $1,234,311 and first turned positive in the seventh year of work. This change in financing from 100% to 0% resulted in a decrease in NPV of $109,335. The direct relationship in which a decrease in financing resulted in a decrease in NPV held true for all scenarios. Lower levels of financing indicated that personal funds were available to either pay for a veterinary education or to be retained for investing at 5% interest for the duration of the alternate career. When those funds are used for a veterinary education, that interest income is no longer available and is an opportunity cost of acquiring a veterinary degree, which lowers the NPV of the veterinary career.
The lowest NPV was a negative $900,354, which is the reduced financial return when compared to that of the alternate career. This was the result of using $45,000 for the first-year direct cost of education, 0% financing, and a starting total compensation of $45,000. As levels of financing in this scenario were increased to 100%, the deficit was reduced by $396,833 to $503,521. The lowest positive NPV in this study was $408. This return was the result of using $15,000 for the first-year direct cost of education, 25% financing, and a starting total compensation of $55,000. The NPV for this scenario first turned positive in the 35th year of work.
Impact of first-year direct cost of education on NPV
Increasing first-year direct cost of education in increments of $10,000 resulted in a reduction in NPV. As shown in Table 2, when financing was 0%, each $10,000 increase in first-year direct cost resulted in a reduction of $151,037 in NPV. As levels of financing were increased to 25%, 50%, 75%, and 100%, the amount of reduction in NPV for each $10,000 increase in first-year direct cost decreased to $127,079; $103,121; $79,162; and $55,204 respectively with varying increases in the years of work required to achieve the first positive NPV. These differences are consistent across all first-year compensations. The difference among levels of financing are attributable to the different amounts of foregone interest income.
Impact of starting total compensation on NPV
Each increase of $10,000 in starting total compensation for the veterinarian, resulted in a $420,388 increase in career NPV as shown in Table 2. This amount of increase was unaffected by first-year direct cost of education or level of financing.
Impact of the level of financing on NPV
Increasing the level of financing in increments of 25%, increased NPVs as shown in Table 2. For a first-year direct cost of education of $15,000, the NPV increased $27,333 for each 25% increase in financing from 0% to 100%. These increases were due to reduced amounts of foregone interest income. For first-year direct costs of education of $25,000, $35,000, and $45,000, the NPV increased by $51,292, $75,250, and $99,208 respectively for each 25% increase in financing. These increases were consistent across all first-year compensations.
Discussion
Compensation
From a purely financial point of view, an investment in a veterinary degree should result in a commensurate increase in earning power over and above what would have been received in an alternate career that did not require additional training.
Recall that every additional $10,000 in starting total compensation increased the career NPV by $420,388. The reason for such a dramatic impact is that all future increases in compensation are based on that beginning amount, the benefit of which is realized in subsequent years of employment. While it might be tempting to compare employment opportunities based on this criterion alone, many factors should be considered such as the cost of living, type of practice, and community factors.
Cost of education
Increases in the cost of education that are passed on to students will result in a decrease in financial return along with an increase in the number of years needed to work to receive the first positive return on the investment. While it seems that the rise in the cost of education is destined to continue, there is a threshold at which students cannot continue to bear the burden of those costs, and still receive what they believe to be an acceptable return on their investment in a veterinary degree.
The percentage impact of increases in the direct cost of education is reduced for higher starting compensations because that cost remains the same regardless of income earned. Consider this example: a starting compensation of $65,000, 50% financing, and a first-year direct cost of education of $15,000. Increasing the first-year direct cost to $25,000 causes the NPV to decrease from $448,202 to $345,081, which is a 23% decrease. For compensations of $75,000 and $85,000, an increase in first-year cost of education to $25,000 results in percentage reductions of 11.8% and 8% respectively. Therefore, the only financial defense against increases in the cost of acquiring a veterinary degree is a commensurate increase in total compensation. If these increases in total compensation are not possible, then the financial concern with borrowing should be the decreased return on investment, not the use of debt in general.
Borrowing
According to the model, increased levels of borrowing resulted in higher NPVs due to reduced amounts of foregone interest income. While foregone interest income is most certainly an opportunity cost, this does not mean that borrowing is more profitable in and of itself, as it is a cost that is experienced in terms of real dollars to the veterinary career. However, if borrowing can be used by a veterinary student to preserve existing personal funds (not accounted for in the model) for long-term investing at a compounding rate of return, then borrowing may be profitable depending on the specific terms of repayment, and rates of borrowing and investment. To study scenarios for which personal funds in the alternate career are not available for investing, refer to financing levels of 100% in Table 2.
For most individuals, borrowing is a necessary and unavoidable cost of investing in a veterinary degree. However, the concern remains whether or not the profits generated from that investment can cover both the cost of borrowing and/or the use of personal funds, and still provide an acceptable return.
Foregone interest income
Compounding interest has often been referred to as the eighth wonder of the world. This impact was demonstrated by the large decreases in NPV associated with lower levels of financing. For example, with 0% financing and a first-year direct cost of $25,000, foregone interest income was greater than $550,000 (data not shown).
Assumptions
Assumptions were required for the alternate career along with interest rates on borrowed and invested personal funds in order to examine the impact of changes in the direct cost of education to students, level of borrowing and starting compensation.
Alternate career compensation
One might suggest that the chosen starting compensation for the alternate career was too high. While lowering would result in a higher NPV for the veterinary career, one would need to reconcile that lower earning power with the skills and abilities of individuals qualified to become a veterinarian.
One might suggest that the starting compensation for the alternate career with annual increases that equaled those of the veterinary career were too low, as it does not account for promotions or changes in employment that would likely occur for someone who has the aptitude and commitment to become a veterinarian. Increasing the compensation for the alternate career, and/or the rate of annual increases would result in decreased NPVs for the veterinary career since the difference in income between the two careers would narrow. In fact, increasing the alternate career total compensation to $66,000 in this study results in a negative NPV for all scenarios (data not shown).
Recall however, that the NPVs in this model are not meaningful in an absolute sense because they are highly dependent on the assumptions used for the alternate career income, discount rate, interest rate on borrowed funds, and interest rate received on invested personal funds. However, the trend remains that higher alternate career compensations lower the relative rate of return to the veterinary career.
Foregone interest rate
Increasing the assumed foregone interest rate causes the alternate career to receive greater amounts of foregone interest income, which would lower NPVs when borrowing is required. As such, to maintain the same NPV, compensation from the veterinary career would need to increase. In the same manner, lowering the assumed foregone interest rate causes NPVs to increase when borrowing is required.
Length of working career
Another assumption of this study is that of a continuous 35-year fulltime working career as a private practice associate. Any interruption such as for starting and/or raising a family or providing care for a family member would result in a lower NPV to the veterinary career if a corresponding lapse is not also used in the alternate career (data not shown). Therefore, if such a lapse were entered in this model for the veterinary career, a corresponding lapse in employment for the alternate career should also be used to account for the same event in both careers.
Practice ownership or veterinary-related business
It bears noting that financial returns calculated in this model do not include additional earnings made possible by having a veterinary degree such as those generated from practice ownership or from owning a veterinary-related business. The reason for this is that in order to receive earnings from owning a practice or a business, a veterinarian would be required to make an additional investment of time and capital beyond that needed for a veterinary degree, and that investment would result in additional risk. Therefore, an additional investment such as this would warrant a separate estimate of its financial return. However, to estimate the financial return on a career that includes ownership of a practice or veterinary-related business, one must offset the total career income received with not only the cost of acquiring a veterinary degree, but also the total career cost of acquiring and maintaining the veterinary practice or business. Even so, the question remains: What financial future is made possible for the employed veterinarians who work in that practice or business?
Future Work
The model described in this study is intended in its current form to be used as a tool for studying broad trends and potential impacts of various organizational interventions, such as changes in the direct cost of education to students, increasing the availability of cost-effective financing, and the establishment of alternative repayment programs. Recall that the NPVs in this study are meaningful only in the sense of quantifying the relative impacts of changes in the direct cost of education to students, starting compensation, and level of borrowing. For that reason, one should not use the results of this study for detailed financial planning. That acknowledged, there are many ways that the model could be enhanced to better inform more detailed financial planning with the assistance of a financial planner.
Enhancements to this model would include: 1) the capacity to track income earned while in veterinary school, 2) the ability to assign different living expenses to both careers, as students in veterinary school often make sacrifices and live in a way that differs from others who would be more established in an alternate career, 3) the ability to account for income taxes in both the veterinary and alternate careers, 4) provision for additional continuing education costs, 5) various options of loan repayment or forgiveness, 6) a provision for interruptions in both the veterinary and alternate careers, and 7) the ability to account for starting or buying into a veterinary practice or veterinary-related business.
Use of the model for a particular individual would also require personalized assumptions, such as alternative career parameters (starting total compensation and annual percentage increases) that reflect that individual’s viable career alternatives. In addition, interest rates on borrowed and invested funds, and a discount rate would be selected that reflect that person’s expectations for the future.
Another opportunity for applying the principles of this model to the veterinary profession is to examine the return on investment for post-DVM training. In essence, the post-DVM training would be modeled in the same manner as the veterinary career, and employment as a veterinarian immediately upon graduation would be represented by the alternate career. This type of application however would require that the model be enhanced to track income while in training as previously mentioned.
This study was deliberately designed to avoid the trap of trying to determine a single value of a veterinary degree based on a prototypical scenario. It does this by considering a range of parameters for the 100 scenarios chosen in this study. As such, one can use Table 2 to identify whichever scenario one thinks is prototypical for a given set of circumstances.
Conclusion
Each year the veterinary profession competes to attract the best and brightest students to join its ranks, and eroding of the financial return of a veterinary degree will only make that effort more difficult. There may already be indications that potential students are less willing to enter the profession, as the veterinary school applicant-to-seat ratio is trending downward from 3.29:1 in 1980 to 2.1:1 in 2011.6
In the final analysis, it is the increased earning power of a veterinary degree that will secure the long-term future of the veterinary profession; by first securing the financial future of employed veterinarians and their families. The intent of the authors is that this model and perhaps others like it will help inform government officials, leaders of the veterinary profession, academic administrators, faculty, practitioners, and stakeholders as they make decisions and take actions that will shape the future of the veterinary profession for its members and those it serves. It is also the intent of the authors to provide future and current veterinary students with information to make informed choices when considering and/or pursuing a career in veterinary medicine.
As the veterinary profession moves towards a One Health worldview, that health must also include the financial health of its most vulnerable members who will eventually be shaping the future as they confront the challenges of a world in need. Identifying and overcoming these challenges will require a sustained effort from a financially sustainable profession.
Footnotes
[a] This assumes that more favorable loan repayment/forgiveness terms or programs are not available such as Income-Based Repayment or Public Service Loan Forgiveness.
References
| 1. | Shepherd AJ, Pikel L. Employment, starting salaries, and educational indebtedness of year-2011 graduates of US veterinary medical colleges. J Am Vet Med Assoc 2011;239:953-957. |
| 2. | AVMA, AVMA Report on Veterinary Compensation. Schaumburg: American Veterinary Medical Association, 2011;72. |
| 3. | Shepherd AJ, Pikel L. Employment, starting salaries, and educational indebtedness of year-2007 graduates of US veterinary medical colleges. J Am Vet Med Assoc 2007;231:1813-1816. |
| 4. | Shepherd AJ. Employment, starting salaries, and educational indebtedness of year-2008 graduates of US veterinary medical schools and colleges. J AM Vet Med Assoc 2008;233:1067-1070. |
| 5. | Gordon ME, Lloyd JW, Harris-Kober DL. Comparison of long-term financial implications for five veterinary career tracks. J Am Vet Med Assoc 2010;237:369-375. |
| 6. | Larkin M. Will Veterinary Education Hit a Tipping Point? J Am Vet Med Assoc 2011; 23:256-260. |
Table 1.
Expense/Income Parameters
|
Direct costs for obtaining a veterinary degree |
| First-year cost of tuition/books/fees/equipment $15,000, $25,000, $35,000 and $45,000
Percentage increase per year in tuition/books/fees/equipment: 4% Number of years to obtain the veterinary degree: 4 |
|
Debt-related expenses for obtaining a veterinary degree |
| Percentage of the costs for tuition/books/fees/equipment and living costs borrowed:0%, 25%, 50%, 75%, 100%
Interest rate on loan: 6% per year Number of years to repay loans: 15 First-year living expenses while in veterinary college: $14,000 Percentage increase per year in living costs: 2% |
|
Total compensation as an employed veterinarian |
| Starting total compensation: $45,000, $55,000, $65,000, $75,000, $85,000
Annual percentage increase in employed income per year: 11%, 24%, 7%, 5%, and 3% thereafter Number of working years: 35 |
|
Foregone alternate career income and foregone interest income |
| First-year foregone income from the alternate career: $40,000
Annual percentage increase in alternate career income per year: Same a veterinary career. Interest rate on personal funds available and not invested in a veterinary degree: 5% Discount rate: 3% |
Table 2.
|
Net Present Value / Number of Years Working for Net Present Value to Become Positive Including Foregone Interest on Personal Income
|
||||||
| Finance 0% |
Starting Compensation |
|||||
|
$45,000/Yrs |
$55,000/Yrs |
$65,000/Yrs |
$75,000/Yrs |
$85,000/Yrs |
||
|
15,000 |
-$447,242 |
-$26,854 |
$393,534/15 |
$813,923/10 |
$1,234,311/ 7 |
|
|
Direct 25,000 |
-$598,280 |
-$177,891 |
$242,497/20 |
$662,885/12 |
$1,083,274/ 9 |
|
|
Cost 35,000 |
-$749,317 |
-$328,929 |
$91,460/27 |
$511,848/15 |
$932,236/11 |
|
|
45,000 |
-$900,354 |
-$479,966 |
-$59,578 |
$360,811/18 |
$781,199/12 |
|
| Finance 25% |
Starting Compensation |
|||||
|
$45,000/Yrs |
$55,000/Yrs |
$65,000/Yrs |
$75,000/Yrs |
$85,000/Yrs |
||
|
15,000 |
-$419,909 |
$480/35 |
$420,868/15 |
$841,256/10 |
$1,261,645/ 7 |
|
|
Direct 25,000 |
-$546,988 |
-$126,599 |
$293,789/19 |
$714,177/12 |
$1,134,566/ 9 |
|
|
Cost 35,000 |
-$674,067 |
-$253,678 |
$166,710/24 |
$587,098/14 |
$1,007,487/10 |
|
|
45,000 |
-$801,146 |
-$380,758 |
$39,631/32 |
$460,019/17 |
$880,407/12 |
|
| Finance 50% |
|
Starting Compensation |
||||
|
$45,000/Yrs |
$55,000/Yrs |
$65,000/Yrs |
$75,000/Yrs |
$85,000/Yrs |
||
|
15,000 |
-$392,575 |
$27,813/32 |
$448,202/15 |
$868,590/10 |
$1,288,978/ 7 |
|
|
Direct 25,000 |
-$495,696 |
-$75,308 |
$345,081/18 |
$765,469/11 |
$1,185,857/ 8 |
|
|
Cost 35,000 |
-$598,817 |
-$178,428 |
$241,960/22 |
$662,348/14 |
$1,082,737/10 |
|
|
45,000 |
-$701,937 |
-$281,549 |
$138,839/27 |
$559,228/16 |
$979,616/11 |
|
| Finance 75% |
|
Starting Compensation |
||||
|
$45,000/Yrs |
$55,000/Yrs |
$65,000/Yrs |
$75,000/Yrs |
$85,000/Yrs |
||
|
15,000 |
-$365,241 |
$55,147/30 |
$475,535/15 |
$895,924/ 9 |
$1,316,312/ 7 |
|
|
Direct 25,000 |
-$444,404 |
-$24,016 |
$396,373/18 |
$816,761/11 |
$1,237,149/ 8 |
|
|
Cost 35,000 |
-$523,567 |
-$103,178 |
$317,210/21 |
$737,598/13 |
$1,157,987/ 9 |
|
|
45,000 |
-$602,729 |
-$182,341 |
$238,048/24 |
$658,436/15 |
$1,078,824/10 |
|
| Finance 100% |
|
Starting Compensation |
||||
|
$45,000/Yrs |
$55,000/Yrs |
$65,000/Yrs |
$75,000/Yrs |
$85,000/Yrs |
||
|
15,000 |
-$337,908 |
$82,481/29 |
$502,869/15 |
$923,257/ 9 |
$1,343,646/7 |
|
|
Direct 25,000 |
-$393,112 |
$27,276/33 |
$447,665/17 |
$868,053/11 |
$1,288,441/8 |
|
|
Cost 35,000 |
-$448,316 |
-$27,928 |
$392,460/19 |
$812,849/12 |
$1,233,237/8 |
|
|
45,000 |
-$503,521 |
-$83,132 |
$337,256/22 |
$757,644/14 |
$1,178,033/9 |
|