It’s no secret that veterinarians enter the profession with large amounts of student loan debt. In fact, according to Student Loan Planner, veterinary medicine is one of the worst graduate degrees when comparing average starting salaries to average debt. Now before you start questioning your chosen career path, realize that student loan debt is not like credit card debt (in most cases). Student loan debt is an investment in you and provides you with the skills necessary to practice as a veterinarian and make a difference in the lives of your patients. Your human capital is one of the best investments you can make. That being said, when looking at a balance of $100k or greater in debt, this may not provide much reprieve. One of the best ways to reduce this debt is to increase your income, which can be achieved through practice ownership. But how can I purchase or start a practice with so much debt, you may ask? Let’s explore.
Student Loans and Monthly Payments
When purchasing or starting a practice, lenders are going to be most interested in your monthly cash flow. This provides the lender with information on your total monthly debt obligations and gives them a clear understanding on your ability to repay the loan. Lenders like to look for a debt-to-income ratio of 50% or below. So if you bring in $10,000/month after-tax, your total monthly debt payments (mortgage, student loans, cars, credit cards, etc.) should be no more than $5,000/month, preferably lower. This says that lenders aren’t as worried with how much student loan debt you carry (your total balance) as they are how much you are paying per month. How can you reduce your debt-to-income ratio? This is where proactive student loan planning comes into play.
Student loans, on a high level, can be classified as either private loans or federal loans. It is important to know what type of loans you carry as the options available to you are dependent on the type of loans you have. Private loans are typically offered through banks or other private organizations and are generally more expensive and less flexible. Federal loans are offered through the government, with terms and conditions that are set by law and include many benefits (fixed interest rates, income-driven repayment plans, loan forgiveness) that are not typically offered through private loans.
If your existing loans are private, the ways to reduce your monthly debt payments are quite simple. You can either consolidate or refinance your loans into a lower interest rate, or look into extending the term of your student loans. By extending the term, you are lowering your monthly payments by lengthening your payment schedule, but will also increase the total amount of interest you pay over the life of your loan.
If your existing loans are federal, there are numerous options available to you. If you currently work or plan to work in the public sector, the Public Student Loan Forgiveness is a great option, though rare for veterinarians. Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) are income-driven options which can reduce your monthly payments, but the determination on which is best depends on whether you intend to pay off your loans in full (REPAYE) or work toward forgiveness (PAYE), as well as other factors such as marital status and future career earnings. Whether repayment or forgiveness is the right path for you will depend on a multitude of factors including income, career/ownership plans, your spouse/partner’s income, amongst others.
When it comes to the options surrounding student loan planning, it can be confusing. The VIN Foundation has a myriad of resources available that are catered specifically to veterinarians.
Of course, financial decisions of this magnitude around your student loans should be made in the larger context of your overall financial plan as some options are irreversible and may result in you paying more in interest over the life of the loan. But this highlights that the path toward practice ownership is not only possible, but probable for those who wish to pursue this goal while carrying student loan debt.
Should I take on additional debt?
Another common worry amongst veterinarians is, Is it prudent to take on additional debt when you have high student loans? With the right mindset and the right practice, the answer is unequivocally yes. Why? Business debt, unlike personal debt, is backed by an asset (the business) that produces income. As the business debt is being paid off by cash flow, equity is built, which increases your net worth. You also increase your earning potential. As an associate, you are paid a salary at a level determined by others. As the business owner, you have the ability to control your income through increased revenue opportunities and proper expense management. Depending on the structure of the practice, as an owner you not only receive income based on your hours work as a veterinarian, you also are entitled to a management fee as well as a return on investment for the business. Plus, if you also own the real estate, the practice will pay the rent which can provide additional income and also increase your real estate equity. According to Praxis, an experienced associate veterinarian earns approximately $80,000/year, while the average owner earns about $282,000/year. Of course this may take time and varies depending on location and the type of practice, but you could pay down your student loan debt pretty quickly with an additional $200,000/year.
Practice ownership is not for everyone, and certainly requires a lot of time and effort. But the opportunity for autonomy, the ability to practice medicine as you best see fit, and the potential for significant financial rewards should put practice ownership on every veterinarian’s radar.
Structuring your debt and personal financial situation when pursuing practice ownership can be overwhelming. We’re here to help. If you’d like additional information about how you can begin preparing to become a practice owner, I encourage you to download our FREE e-book “The Veterinarian’s Guide to Personal Finance: 7 Actions to Take When You Want to Own Your Own Practice”.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.