Q&A: Employer student loan repayment rules for 2025–2026
Question
I have questions about the current rules around employer student loan repayment benefits. My understanding is that employers can contribute up to $5,250 per employee per year toward qualified education expenses—including student loan repayment—on a tax-free basis for both the employer and employee if done under a compliant educational assistance program.
- Is this $5,250 tax-free allowance still valid for 2025 and 2026? If so, does the employer have to have an official policy?
- If an employer implements a student loan repayment program, can contributions be made on a discretionary basis (e.g., replacing a bonus or unused health insurance contribution), or would it create an ongoing annual obligation similar to a Safe Harbor 401(k) match?
Answer
Under Section 127 of the Internal Revenue Code, to qualify as nontaxable, reimbursement payments must be made in accordance with an employer’s written educational assistance plan. The tax consequences of tuition assistance programs are regulated by the Internal Revenue Service under 26 USC Sec. 127, often referred to as Section 127 plans. Generally, a tuition assistance program (TAP) provided to an employee is excluded from an employee’s gross income if the employer’s plan meets certain IRS requirements (see 26 USC Sec. 127).
An educational assistance program is a separate written plan that provides educational assistance only to a company’s employees. The IRS provides a sample plan here: Publication 5993 (6-2024).
The program qualifies only if it does all of the following:
- Provides benefits only to an employer’s employees
- Provides only qualified educational assistance benefits
- Does not allow employees a choice between educational assistance benefits and cash
- Does not discriminate in favor of highly compensated employees
An employer may tailor its plan to include, for example, conditions for eligibility, when an employee’s participation in the plan begins, and prorated benefits for part-time employees. However, a program cannot discriminate in favor of officers, shareholders, self-employed, or highly compensated employees in requirements relating to eligibility for benefits.
Tax-free educational assistance benefits under a section 127 educational assistance program include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses, nor are they required to be part of a degree program.
Tax-free educational assistance benefits also include principal or interest payments on qualified education loans (as defined in section 221(d)(1) of the Code). Section 127 requires that such loans be incurred by the employee for the education of the employee and not for the education of a family member, such as a spouse or dependent. The payments of any qualified education loan can be made directly to a third party, such as an educational provider, loan servicer, or directly to the employee.
Educational assistance benefits may not include payments for the following items:
- Meals, lodging, or transportation.
- Tools or supplies (other than textbooks) that an employee can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that an employee keeps).
- Courses involving sports, games, or hobbies, unless they:
- Have a reasonable relationship to the employer’s business, or
- Are required as part of a degree program.
Student debt may consist of a variety of expenses. If the debt was incurred as a result of expenses that are permissible benefits under section 127 of the Code (such as tuition, books, equipment, qualified education loans, etc., the employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy their debt. To be excluded from the employee’s gross income, the employee must be prepared to substantiate the expenses to the employer.
Under President Trump’s Big Beautiful Bill, the “CARES Act” expansion of IRC Section 127 is now permanent, allowing annual employer-provided tax-free amounts to continue to be used for student loan repayment and tuition assistance. Additionally, pursuant to the Act, the annual tax-free benefit of $5,250, which had been capped for decades, will be indexed annually for inflation beginning in 2026.
Accordingly, the limit for 2026 will be $5,250, but thereafter the limit will be adjusted annually.
An educational assistance program need not be prefunded or funded at all annually (26 U.S.C. § 127). Therefore, setting up an educational assistance program does not create an ongoing annual obligation.
However, reasonable notification of the availability and terms of the program must be provided to eligible employees. This is unlikely to be met if an employer had discretion to pull back announced benefits for a plan year during the year (e.g., at year-end when they figure out if they can fund the essentially promised benefits. From a broader HR/employee benefits perspective, discretionary funding of a plan can really only be made ahead of the year the benefit is being offered.
An educational assistance program may not allow employees a choice between educational assistance benefits and cash. Accordingly, an employer may not have an employee choose between educational assistance and a bonus. However, as there is no legal requirement that employers provide bonuses to employees, an employer could choose to offer educational assistance rather than a bonus in a particular year.
There are strict legal requirements under federal law regarding when an employer may compensate an employee for declining health insurance. Such arrangements are known as “compensation in lieu of benefits” or “opt out arrangements.”
However, these arrangements deal with cash compensation, not educational benefits. We did not find anything that would indicate that allowing an employee to decline health insurance in order to obtain educational assistance would be legally permissible. An employer considering doing so should first consult with an attorney.
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