Employer Student Loan Repayment: $5,250 Exclusion and Section 127

The CARES Act let your employer pay up to $5,250 per year toward your student loans without that money counting as taxable income to you. It did this by expanding Internal Revenue Code Section 127, which already covered benefits like tuition reimbursement, to include payments on qualified education loans. The original expansion was temporary, but the One Big Beautiful Bill Act signed in 2025 made employer student loan repayment under the CARES Act framework a permanent part of Section 127.¹

How the $5,250 Tax Exclusion Works

Your employer can put money toward the principal or the interest on your student loans, up to $5,250 in a calendar year, and that amount is excluded from your gross income.² The payment can go directly to your loan servicer, or your employer can reimburse you for payments you already made. If it’s a reimbursement, expect to hand over documentation showing the payment actually happened.³

The excluded amount escapes federal income tax, Social Security tax, and Medicare tax on both sides of the paycheck.⁴ An employee in the 22% federal bracket who receives the full $5,250 saves roughly $1,550 in combined federal income and payroll taxes, and the employer also skips its share of FICA on that amount.

The Cap Is Shared With Tuition Reimbursement

The $5,250 limit is a single annual ceiling covering every kind of educational assistance your employer provides under Section 127. If your employer pays $3,000 on your student loans and $2,000 in tuition during the same year, only $250 of the exclusion is left.² Anything above the cap in a given year gets added to your taxable wages.³

The $5,250 is also not prorated. An employee who joins mid-year still has the full annual amount available. Your employer can set its own eligibility rules and start dates, but the statutory ceiling itself doesn’t shrink for part-year workers.³

Which Loans Qualify

The benefit uses the definition of “qualified education loan” from Section 221(d)(1). Both federal and private student loans qualify, as long as they were taken out to pay for qualified higher education expenses (tuition, fees, books, supplies, room and board) at an eligible institution.⁵

Refinanced or consolidated loans still count. The statute specifically includes indebtedness used to refinance a qualified education loan.⁵ Undergraduate and graduate loans are both eligible.³

The important limit: the loan has to be for your own education. Parent PLUS loans you took out for a child, or a spouse’s student debt in your name, don’t qualify for the exclusion.² Loans from related parties or from an employer plan are also outside the definition.⁵

No Double-Dipping With the Student Loan Interest Deduction

If your employer pays $3,000 of interest on your loans tax-free under Section 127, you cannot also claim that same $3,000 as a student loan interest deduction on your personal return. The code explicitly bars using the same dollars twice.⁵ Interest you paid out of your own pocket is still deductible under the normal $2,500 annual cap and income limits. Just keep the employer-paid portion separate in your records.

What Your Employer Needs in Place

The exclusion only works if your employer has a formal, written educational assistance program. A handshake arrangement with a manager isn’t enough. The plan has to be a separate written document that exists for the exclusive benefit of employees.⁶ Eligible employees must receive reasonable notice about the program, and it cannot let workers choose between the assistance and additional taxable pay.²

If your employer already reimburses tuition under a Section 127 plan, adding student loan repayment is an amendment to that plan, not a new one. Ask HR whether the existing plan document has been updated to include loan payments.

What to Expect on Your W-2

Payments excluded under Section 127 generally don’t show up on your W-2 as wages, because they aren’t wages for income tax or employment tax purposes.¹ The tax-free portion shouldn’t appear in Box 1, Box 3, or Box 5. Some employers report it in Box 14 as an informational note so you can track your usage against the $5,250 cap; that’s a courtesy, not a requirement.

Anything above $5,250 in a year gets treated as regular taxable wages. The excess flows into Boxes 1, 3, and 5 and is subject to income tax withholding and payroll taxes like any other pay.⁷ The tax-free portion is also exempt from federal income tax withholding, provided it’s reasonable to believe you can exclude the benefit from income.⁸

From CARES Act to Permanent Law

Section 127 has existed since 1978, but for most of its life it covered only traditional educational expenses like tuition and books. The CARES Act of 2020 added student loan repayment to the definition of “educational assistance” for payments made after March 27, 2020.³ That change was set to expire at the end of 2020. The Consolidated Appropriations Act of 2021 pushed the deadline out to December 31, 2025.⁹

The One Big Beautiful Bill Act (Pub. L. No. 119-21) then removed the expiration entirely. Employer student loan payments now sit on equal footing with tuition reimbursement under Section 127, with no sunset date.¹

State Taxes May Not Follow

Most states conform to the federal exclusion, but conformity is not automatic and it isn’t universal. Check whether your state has adopted Section 127 before assuming the benefit is tax-free on your state return as well. If your state doesn’t conform, the $5,250 could still be taxable at the state level even though it’s exempt federally.

1
Internal Revenue Service. Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits
2
Office of the Law Revision Counsel. 26 U.S. Code 127 – Educational Assistance Programs
3
Internal Revenue Service. Frequently Asked Questions About Educational Assistance Programs
4
Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions
5
Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans
6
eCFR. 26 CFR 1.127-2 – Qualified Educational Assistance Program
7
Internal Revenue Service. Publication 5993 – Sample Educational Assistance Program Plan
8
eCFR. 26 CFR 31.3401(a)(18)-1 – Payments or Benefits Under a Qualified Educational Assistance Program
9
Internal Revenue Service. IRS Reminds Employers: Educational Assistance Programs Can Help Pay Employee Student Loans Through 2025