Tax-free student loan reimbursement has been an increasingly valuable benefit for employees and employers alike — allowing workers to receive employer contributions toward their student loan payments without those contributions being taxed as income. This provision, originally temporary, has shaped workplace benefits and helped millions manage their student debt.
What Is Tax-Free Student Loan Reimbursement?
Under Internal Revenue Code Section 127, employers can offer educational assistance programs that exclude up to $5,250 per year of benefits from an employee’s taxable income. Originally, this applied to tuition, fees, books, and supplies — but recent legislation expanded it to include employer payments toward qualified student loan principal and interest.
Thanks to provisions in the CARES Act and the Consolidated Appropriations Act, employers could contribute directly to employees’ student loans — either by paying the lender or reimbursing the employee — without federal income taxation on those amounts.
This benefit acts much like a bonus or extra compensation without federal income tax, which can significantly increase the value of what employers offer to help workers pay down debt.
How It Works in Practice
For employers to offer this benefit properly:
A written Section 127 Educational Assistance Program must be in place.
The plan must not discriminate in favor of highly compensated employees.
The total assistance — including student loan payments and other educational assistance — must not exceed $5,250 per year per employee.
A “qualified education loan” generally refers to debt incurred by the employee for their own education — households cannot benefit from employer payments toward loans taken out for spouses or dependents.
Sunset and Future Changes
Prior to recent legislative updates, the tax-free treatment of student loan repayment under Section 127 was scheduled to expire on December 31, 2025. According to IRS guidance, after that date payments of principal or interest on student loans wouldn’t qualify for the exclusion unless Congress acted.
However, other tax law changes (such as the One Big Beautiful Bill Act — OBBBA) have made the tax-free student loan reimbursement permanent, eliminating the sunset and allowing both employers and employees to count on this benefit beyond 2025. Under this updated framework, the $5,250 exclusion will also be indexed for inflation starting in 2026, increasing its long-term value.
Why This Matters
For employees, tax-free student loan reimbursement can effectively increase take-home value and help accelerate debt repayment without the burden of additional taxes. For employers, it’s a competitive tool to attract and retain talent — especially in industries where student debt is prevalent.
With both short-term changes and long-term permanence now part of the discussion, staying informed about tax-free student loan reimbursement benefits is essential for HR professionals, financial planners, and employees alike.
For more info, visit here:- Employer education assistance program