One Code Section, Two Benefits, One Shared Limit
Employer-paid tuition and employer-paid student loans are the same benefit under the tax code. Both run through Internal Revenue Code Section 127, both are excluded from the employee’s income and from payroll taxes, and both draw on a single annual cap.
| 2026 | |
|---|---|
| Maximum tax-free educational assistance per employee | $5,250 |
| Indexed for inflation | For tax years beginning after 2026 |
That single cap is the point most often missed. An employee who receives $4,000 in tuition assistance has $1,250 of room left for loan repayment that year — not a fresh $5,250. Employers running both benefits without tracking them together create taxable income by accident.
See also: Improving Health. Controlling Costs. Delivering Results., our approach for employers who want cost to move between renewals.
What Changed, and Why It Matters Now
Applying Section 127 to student loan repayment started as a temporary pandemic-era measure with a sunset date, and the sunset is why many employers never bothered: few want to launch a benefit, communicate it, and then withdraw it. That provision has since been made permanent, and the long-frozen $5,250 cap will now be adjusted for inflation.
For a workforce carrying education debt, this is among the most direct things an employer can do with a benefits dollar. It is also one of the few benefits where the employee sees the full value immediately rather than as insurance against something that may not happen.
What Qualifies
| Qualifies | Does Not Qualify |
|---|---|
| Tuition and enrolment fees | Meals |
| Books, supplies and equipment not kept after the course | Lodging |
| Principal and interest on qualified education loans | Transportation |
| Courses that are not job-related | Cash the employee could take instead |
The job-relatedness point is worth drawing out. Section 127 does not require the education to relate to the employee’s work or lead to a degree, which is a broader test than the working condition fringe rules most employers assume apply. An employee studying something unconnected to their role still qualifies.
What Setting One Up Requires
- A separate written plan. Not a line in the handbook — a document establishing the programme and its terms.
- No cash alternative. If the employee can elect cash instead, the exclusion is lost for everyone.
- Communication to eligible employees. A plan nobody knows about does not satisfy the requirement, and will not achieve anything anyway.
- Nondiscrimination. The programme cannot favour highly compensated employees, and no more than 5% of benefits may go to more-than-5% owners or their families.
- Tracking against the shared cap, so tuition and loan payments to the same employee in the same year do not exceed $5,250 between them.
The Arithmetic for the Employer
Because the benefit is excluded from wages rather than paid as additional compensation, the employer avoids its 7.65% FICA share on every dollar. An employer routing the full $5,250 for an employee saves roughly $402 in payroll tax against that payment, and the employee receives the whole amount rather than a post-tax remainder.
Compare that with a raise intended to help with the same debt: to put $5,250 in the employee’s hand after tax, the employer pays materially more and owes FICA on all of it. That gap is the whole case for running it as a benefit rather than as pay.
We can set the plan up and coordinate the administration. If you are weighing it against other retention spending, the comparison worth running is against what a raise of equivalent take-home value would actually cost you.
Questions We Get
How much student loan repayment can an employer provide tax-free?
Up to $5,250 per employee per year for 2026 under Internal Revenue Code Section 127. The amount is excluded from the employee’s income and from payroll taxes, and it is deductible to the employer. The $5,250 cap is adjusted for inflation for tax years beginning after 2026.
Is employer student loan repayment permanent now?
Yes. The ability to apply Section 127 to qualified education loan repayment began as a temporary CARES Act measure and has been made permanent. Employers no longer need to treat it as a benefit with an expiry date, which is what had kept many from setting one up.
Do tuition reimbursement and student loan repayment share the same limit?
Yes, and this is the detail most employers miss. Both run through Section 127 and draw on a single combined $5,250 annual cap. An employee receiving $4,000 of tuition assistance has $1,250 of room left for loan repayment that year, not a second full allowance.
What expenses qualify for tuition reimbursement?
Tuition, fees, books, supplies and equipment, provided the employee does not keep the equipment after the course ends. Meals, lodging and transportation do not qualify. Usefully, the education does not have to be job-related or part of a degree program — a broader test than the working condition fringe rules.
Do we need a written plan document?
Yes. Section 127 requires a separate written plan, communicated to eligible employees, that does not let employees choose cash instead of the benefit. Paying an employee’s tuition without a plan in place makes the payment taxable wages rather than an excluded benefit.
Can we offer it only to senior staff?
No. Section 127 carries its own nondiscrimination rules — the programme cannot favour highly compensated employees, and no more than 5% of benefits may go to more-than-5% owners or their families. An executive-only education benefit fails the same way an executive-only medical reimbursement arrangement does.
Does the employer save payroll tax on these payments?
Yes. Because the benefit is excluded from wages rather than being additional compensation, the employer avoids its 7.65% FICA share on every dollar routed through the plan, and the employee pays no income or payroll tax on it either.
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