Author: Scott M. Safriet, CVA, MBA & Elizabeth Cohen, JD
For physicians that have recently completed their medical education, student loan repayment is an often asked for benefit when contemplating employment opportunities. However, while not technically cash in hand to the physician, it is nonetheless considered a form of “in-kind” compensation. From a valuation perspective, two aspects must hold true…(i) the method of the student loan repayment must be commercially reasonable (i.e., the structure of repayment is typically a choice between the employer paying the money to the physician or making payments directly to the loan holder); and (ii) the amount of the loan repayment must fit within the fair market value (FMV) of the overall arrangement.
A review of applicable benchmark survey data indicates that while the percentage of physicians receiving student loan repayment is indeed increasing, the vast majority of the time aggregate loan assistance amounts are $100,000 or less in magnitude (even if the actual remaining loan obligation is higher). Given this information, the structure of the payment is key to the commercial reasonableness and FMV of the employment agreement. An arrangement in which an employer pays an upfront lump sum payment directly to the physician, even if such amount is intended to be “amortized” over the reasonable term of the employment agreement, leaves the employer vulnerable to the logistical difficulty of collecting the unamortized portion back in the event the physician leaves before the end of his/her contract expiration. To avoid this, employers should consider making standard practice the addition of language in the underlying employment agreement that requires the student loan repayments be made directly to the loan holder (i.e., the financial institution) over the course of the agreement term. By doing this, should the arrangement terminate early, payments to the loan institution are simply discontinued, avoiding the need for payback.
From a valuation perspective, in our experience and informed judgment, we do not believe the widely relied upon sources of benchmark physician compensation data adequately capture the magnitude of student loan repayments, as many experienced physicians may have no remaining loan obligations. As such, while the entirety of the loan repayment amount must still be considered compensation to the physician, to facilitate a more accurate comparison to benchmark information, when conducting the valuation analysis itself, we believe it is appropriate to incorporate a reasonable “offset” to the loan amount (i.e., by effectively decreasing the proposed student loan repayment by a defined amount).
FMV Pitfall: Student loan repayment clauses within employment arrangements must be structured carefully. If the proposed amount of the student loan repayment is too high, or is structured in such a way as to create a high risk to the employer of losing the funds in the event the physician leaves early, the arrangement may be subject to regulatory challenge. Engaging a qualified healthcare valuation expert to evaluate both the student loan repayment clause on its own, as well as in the context of the broader physician employment arrangement, can mitigate the risk of a significant mismatch between physician services and compensation in its entirety.