Janice Lozano
Student loan debt is a pressing issue in the United States, with a $1.6 trillion student debt balance. To tackle this, employers can now offer student loan repayment assistance as a benefit to their employees. This benefit is tax-free for both the employer and the employee, up to a limit of $5,250 per employee per year. This legislation was introduced in 2020 through the CARES Act and Consolidated Appropriations Act and was made permanent in 2025 through the One Big Beautiful Bill. Employers can make payments directly to the lender or to the employee.
| Characteristics | Values |
|---|---|
| Maximum annual exclusion for educational assistance per employee | $5,250 |
| Payments above $5,250 | Taxable as wages |
| Payments below $5,250 | Tax-free |
| Payments made before March 27, 2020 | Taxable |
| Payments made after December 31, 2025 | Taxable (unless extended by future legislation) |
| Payments made between March 27, 2020, and December 31, 2025 | Tax-free |
| Payments made by | Employers |
| Payments received by | Employees |
| Payment options | Direct to the lender or to the employee |
| Purpose of payment | To pay principal and interest on an employee's qualified education loans |
| Type of loan | Federal or private |
| Type of assistance | Financial |
| Type of program | Educational assistance |
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What You'll Learn
- Student loan repayment assistance from employers was taxable before 2020
- Employers can pay up to $5,250 tax-free per employee per year
- Payments can be made directly to the lender or employee
- Payments are limited to principal and interest on qualified education loans
- Payments are not taxable income for the employee or payroll taxes for the company
Student loan repayment assistance from employers was taxable before 2020
Before the passing of these acts, student loan repayments of any amount were taxable. Now, employers can make tax-free student loan payments until December 31, 2025, unless future legislation extends the deadline. This change has made the benefit increasingly popular, with 34% of employers offering it at the end of 2023, up from 17% in 2021.
To establish a qualifying student loan repayment program, employers must follow certain IRS rules. This includes having a written plan outlining the terms and conditions, not giving more than 5% of total annual benefits to employees who own more than 5% of the company's stock, and giving reasonable notice of the program to eligible employees.
The IRS also reminds employers and employees that under federal law, employers who have educational assistance programs can use them to help pay student loan obligations for their employees. This benefit not only provides a pathway towards student debt relief for borrowers but also helps employers attract and retain talented employees.
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Employers can pay up to $5,250 tax-free per employee per year
This means that employers can either make payments to the employee or the student loan lender directly, without this counting as taxable income for the employee. This benefit is also tax-free for employers, who will not have to pay payroll taxes on these amounts.
The $5,250 cap applies across both student loan payments and traditional tuition reimbursement, so an employee cannot receive $5,250 for each. For example, if an employer reimburses an employee $3,000 for a graduate course and pays $2,000 toward their student loans, the full $5,000 is tax-free. However, if the total exceeds $5,250, the extra amount would be taxed as wages.
To offer this benefit, employers must establish a formal, written educational assistance program, which must be non-discriminatory and cannot favour highly compensated employees.
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Payments can be made directly to the lender or employee
Employers can make student loan payments of up to up to $5,250 per employee per year, tax-free. This can be paid directly to the lender or to the employee. This benefit was introduced in March 2020 and was initially set to expire in 2025, but it has since been extended indefinitely.
The tax-free benefit applies to payments made toward the principal and interest on an employee's qualified education loans. It is important to note that this benefit is only applicable if the loan was taken out to pay for qualifying education expenses. For example, the loan must have been taken out to pay for education during an academic period for an eligible student enrolled at least half-time in a program leading to a degree, certificate, or other recognised educational credential.
Employers can make payments directly to the lender or reimburse the employee. This benefit is not limited to federal loans and can also be applied to private loans. It is important to note that the $5,250 cap applies across both student loan payments and traditional tuition reimbursement, so an employee cannot receive the maximum amount for each.
The benefit is a valuable tool for employers to attract and retain high-quality talent, and it is becoming increasingly popular. In 2019, only 8% of companies offered this benefit, but that number has been steadily increasing. By the end of 2023, 34% of employers offered student loan repayment assistance, up from 17% in 2021.
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Payments are limited to principal and interest on qualified education loans
Employers can provide tax-free assistance to their employees to help pay off their student loans. This benefit is not new, but it gained a tax-exemption status in 2020 due to the CARES Act and the Consolidated Appropriations Act. This legislation allows employers to provide up to $5,250 in annual student loan repayment assistance without tax consequences for the employer or the employee. This amount is the combined limit for loan repayment and other types of educational assistance under Section 127 of the Internal Revenue Code.
The option to use educational assistance for student loan repayment is available for payments made after March 27, 2020, and was initially set to expire on December 31, 2025. However, Congress passed the One Big Beautiful Bill in July 2025, which removed the deadline and made this benefit permanent. The legislation also indexed the limit to inflation, rounded to the nearest multiple of $50, allowing the amount to rise every year.
The educational assistance must be provided under a formal, written educational assistance program sponsored by the employer. This program must have a written plan and a nondiscriminatory application process, meaning the benefit cannot be offered only to highly compensated employees. Payments made directly to the lender or to the employee qualify.
It is important to note that the tax-free benefit applies only to the principal and interest on qualified education loans. For example, employees cannot receive the full $5,250 each for student loan payments and traditional tuition reimbursement. Additionally, any amount provided above the $5,250 limit will be included in the employee's income and will be subject to taxes.
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Payments are not taxable income for the employee or payroll taxes for the company
Student loan assistance from an employer is a benefit where the employer makes payments to pay for part or all of an employee’s student loans. Employers can make payments (principal or interest) to the employee or the student loan lender directly.
Before March 2020, student loan repayments of any amount were taxable. However, the government passed the CARES Act and Consolidated Appropriations Act of 2020, making employer student loan repayments tax-free until December 2025. This was later extended by the One Big Beautiful Bill, which removed the deadline.
By law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Assistance provided above this level is taxable as wages. Employers who don't have an educational assistance program may want to consider setting one up.
The IRS considers employer-sponsored student loan repayment assistance to be tax-free because the assistance provided by the employer is not considered taxable income for the employee. This means that payments are not taxable income for the employee or payroll taxes for the company.
Employees who receive this benefit do not report it as income, and employers avoid payroll taxes on those amounts. The $5,250 cap applies across both student loan payments and traditional tuition reimbursement, so an employee cannot receive $5,250 for each.
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Frequently asked questions
Yes, your employer can pay up to $5,250 per year toward your student loan payments without it being considered taxable income. This benefit is available until December 31, 2025, unless future legislation extends the deadline.
Employers can either make payments to the employee or the student loan lender directly.
There are limitations and requirements for tax-free employer assistance in repaying student loans. For example, the IRS says amounts above the $5,250 per employee limit could be subject to tax as wages. The educational assistance must be given under a formal, written educational assistance program sponsored by the employer, and it cannot favour highly compensated employees.
