Lana Oconnell
Student loan debt is a burden for many, but some employers are now offering valuable assistance to their employees in the form of tax-free student loan repayment benefits. In March 2020, the IRS established the option for employers to include, in a qualifying Educational Assistance Program, the ability for employees to pay back their college loans with pretax dollars. This means that employers can now pay up to $5,250 per year, per employee, towards student loan payments, and this amount can be excluded from income and federal withholding, Social Security, Medicare, and Federal FUTA tax. This benefit can be used to attract and retain workers and is set to be permanent, indexed to inflation from 2026.
| Characteristics | Values |
|---|---|
| Can employers pay off student loans pre-tax? | Yes, employers can pay off student loans pre-tax. |
| How much can employers pay pre-tax? | Up to $5,250 per employee per year. |
| Is this a permanent option? | Yes, as of July 4, 2025, this option is permanent and will be indexed to inflation from 2026. |
| What are the requirements? | Employers must establish a qualifying Educational Assistance Program (EAP) with a written plan outlining terms and conditions. |
| Can employers pay the loan provider directly? | Yes, payments can be made directly to the lender or to the employee. |
| Are there tax benefits for employers? | Yes, employer Social Security and Medicare taxes are exempt on amounts up to $5,250. |
| Are there other benefits for employers? | EAPs can be used as a recruitment incentive and to retain employees. |
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What You'll Learn
Tax-free student loan repayment
In March 2020, the Internal Revenue Service (IRS) established the option for employers to include, in a qualifying Educational Assistance Program (EAP), the ability of employees to pay back their college loans, including principal and interest, with pretax dollars. This option will be available until December 31, 2025, and in most cases, will be excluded from federal withholding, Social Security, Medicare, and Federal FUTA tax. However, there is a limit of $5,250 per employee per year for tax-free student loan repayment assistance, and any amount over this limit will be considered taxable income.
To qualify for the tax-free benefit, employers must establish a qualifying EAP with a written plan outlining the terms and conditions. The EAP must be available on substantially the same basis to each member of a group of employees, such as full-time or part-time workers, and must not favor highly compensated employees. Employers can make payments directly to the employee or the student loan lender.
Employees should check with their employer to see if they offer a formal educational assistance program and, if not, suggest that they consider implementing one. This can be a valuable benefit for employees struggling with student loan debt, and it can also help employers attract and retain workers.
It is worth noting that certain government programs may offer higher tax-free assistance caps than employer-based offerings, and these programs are often tied to specific career choices, such as health professionals, public defenders, military members, and STEM workers.
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Employer-paid student loans
The US government has made it easier for employers to provide their employees with tax-free student loan repayment benefits. This provision was included in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, which expanded coverage for education assistance under Section 127 of the IRS code.
Employers can now repay up to $5,250 per year of student loans on behalf of an employee without reporting the payment as income to the employee. This benefit is not subject to income tax or FICA taxes (Social Security and Medicare taxes).
To provide this benefit, employers must establish a qualifying Educational Assistance Program (EAP) with a written plan outlining the terms and conditions. The program must be available to all employees on the same basis and must not favour highly compensated employees.
Employees can receive this benefit in various forms, including signing bonuses, recurring payments directly to lenders, or payments included in their paychecks. It's important to note that any payments exceeding $5,250 are taxable as income to the employee.
By offering student loan repayment assistance, employers can attract and retain talented workers, especially recent college graduates burdened by student loan debt.
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Educational Assistance Programs
In March 2020, the Internal Revenue Service (IRS) established the option for employers to include, in a qualifying Educational Assistance Program (EAP), the ability for employees to pay back their college loans with pretax dollars. This option will be available until December 31, 2025, and in most cases, the assistance provided to employees by employers is not subject to tax. However, any amount over $5,250 per year will be considered taxable income for the employee.
To qualify as an EAP, employers must implement a written plan outlining the terms and conditions. While the IRS does not provide details of the required language, templates can be found online. The program must be available to all employees, and benefits must be on the same basis for each member of a group of employees, such as full-time or part-time workers. Employers should also give reasonable notice of the program to eligible employees.
Some companies may offer a signing bonus for loan repayment, while others make recurring payments directly to the lender. In some cases, employers may include the assistance in the employee's paycheck, which they can then use to pay down their loans.
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Tax-saving for employers and employees
In March 2020, the IRS established the option for employers to include, in a qualifying Educational Assistance Program (EAP), the ability for employees to pay back their college loans with pretax dollars. This option will be available until December 31, 2025, and in most cases, the assistance provided to employees by employers is not subject to tax. However, there are some limitations and requirements. Firstly, the educational assistance must be given under a formal, written educational assistance program sponsored by the employer. Secondly, the tax-free benefit is limited to $5,250 per employee per year. Any amount above this limit will be taxable as income to the employee and subject to employment taxes.
To establish a qualifying EAP, employers must meet certain requirements. Firstly, there should be a written plan outlining the terms and conditions of the program. Secondly, reasonable notice of the program should be provided to eligible employees, and the plan benefits must be available on substantially the same basis to each member of a group of employees. Lastly, employers should retain documentation, although they are not required to complete any additional tax filings for their EAP.
By implementing an EAP, employers can attract and retain workers, especially recent college graduates. This can be a cost-effective way to enhance recruitment initiatives without offering raises. Additionally, employees can benefit from tax savings by excluding up to $5,250 per year from their income when paying off student loans through an EAP. This can result in significant savings for employees by reducing their taxable income and exempting the compensation from FICA taxes.
In conclusion, establishing an EAP can provide tax-saving benefits for both employers and employees. Employers can attract and retain talent, while employees can take advantage of tax-free assistance in paying off their student loans. With the option now permanent and indexed to inflation, employers and employees can utilize this strategy to manage student loan debt effectively.
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Loan repayment methods
Student loan repayment by employers is a benefit that helps employees reduce their student loan debt. There are various methods through which employers can assist employees in repaying their student loans.
Firstly, employers can establish a qualifying Educational Assistance Program (EAP) or a Section 127 education assistance program. This allows employees to repay their college loans, including principal and interest, with pretax dollars. Until December 31, 2025, the repayment of student loans under this program will be considered a qualifying "educational assistance" exclusion from employee income and federal withholding, Social Security, Medicare, and Federal FUTA tax. The maximum annual exclusion for educational assistance per employee is $5,250, and any amount above this limit may be subject to tax. The EAP must be offered on substantially the same basis to each member of an eligible group of employees and must not favor highly compensated employees.
Secondly, employers can offer signing bonuses, which are lump-sum payments provided as a recruitment incentive or after an employee has been employed for a specific period. These bonuses can be used by employees to repay their student loans.
Thirdly, employers can provide recurring payments, which are regular installments made directly to lenders on behalf of employees. These payments can be made monthly, annually, or at other specified intervals.
Additionally, some employers may offer a Paid Time Off (PTO) exchange program, where employees can swap their unused PTO for cash applied to their student loans.
It is important to note that employer educational assistance and tuition reimbursement are different. Educational assistance programs cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Employers can create student loan repayment programs that fit their budget and employees' needs, providing flexibility in repayment methods.
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Frequently asked questions
A pre-tax student loan repayment is when an employer repays an employee’s student loan on a pre-tax basis. This means that the employee can exclude the repayment from their income, and it is not subject to federal withholding, Social Security, Medicare, and Federal FUTA tax.
An employer can pay up to $5,250 per year, per employee, in student loan repayments without it being considered taxable income for the employee. Any amount above this is considered a taxable wage.
An EAP is a formal, written plan outlining the terms and conditions of an employer's educational assistance. It must be available to all employees on the same basis and must not favor highly compensated employees.
You should check with your employer to see if they offer an EAP and what the eligibility requirements are. Some companies offer the benefit from the start, while others require a length of service before you qualify.
Employers can make payments directly to the lender, or to the employee, to cover either the principal or interest of the loan. This can be a signing bonus, recurring payments, or a lump-sum payment after a set period of employment.
