More than 43 million people have federal student loan debt. And this month, many borrowers resume making student loan payments — with interest — after an unprecedented multiyear pause. The U.S. Department of Education is offering programs, including new income-driven repayment options like the SAVE repayment plan, to help lower payment amounts. And now, the IRS is reminding borrowers (and employers) about a lesser-known, tax-free way to get help with student loan repayment.
"The IRS wants to remind both employers and employees about this special feature that can help with student loans," IRS Commissioner Danny Werfel said in a statement urging employees and employers not to overlook a potentially beneficial option.
Tax-free student loan repayment assistance
Employer educational assistance programs, which aren’t new, can assist employees in paying off their student loans — at least for a while.
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- The option to use educational assistance is available, under current law, for payments made after March 27, 2020.
- If nothing changes legislatively, the ability to use the programs to help with student loan repayment will continue for the next two years or so, until Dec. 31, 2025.
The good tax news is that in most cases, the assistance provided to employees by employers that meets specific requirements isn’t subject to tax. Here’s what else you need to know about how educational assistance programs work.
Employer educational assistance vs. tuition reimbursement
Employer educational assistance programs allow employers to provide tax-free financial assistance to employees for certain education expenses. Historically, these programs have been used to help employees pay for books, equipment, supplies, fees, tuition, and other education expenses.
However, due mainly to the pandemic, employer educational assistance can now be used to pay principal and interest on an employee's qualified education loans. According to the IRS, payments made directly to the lender and those made to the employee qualify.
This employer-sponsored student loan repayment assistance is tax-free because the IRS doesn’t consider the assistance provided by the employer to be taxable income for the employee. However, the maximum annual exclusion for educational assistance an employer provides, per employee, is $5,250.
In a statement provided on the IRS website, Virginia Sen. Mark Warner encouraged employers to take full advantage of these programs as student loan payments resume for millions across the country,
"This benefit not only provides a pathway towards student debt relief for borrowers but also gives employers the ability to recruit and retain high-quality talent,” Warner said.
How does tuition reimbursement work? It’s important to note that employer educational assistance and tuition reimbursement are different. Educational assistance programs can cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Tuition reimbursement programs, on the other hand, typically cover only tuition and related expenses for courses taken while employed. Check with your employer if you’re unsure about education-related benefits they do or don’t offer.
There are also limitations and requirements for tax-free employer assistance in repaying student loans that you need to consider.
- For example, the IRS says amounts above the $5,250 per employee limit could be subject to tax as wages. (In that case, your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.)
- Additionally, the educational assistance must be given under a formal, written educational assistance program sponsored by the employer.
- The assistance provided by the employer cannot favor highly compensated employees.
Bottom line
However, if you are looking for a tax-free way to help repay your student loan, it’s worth checking to see if your employer offers a formal educational assistance program.
And if you’re an employer that doesn’t have such a plan, the IRS describes it as a “worthwhile fringe benefit” that can help your business attract and retain workers. The agency also has a free webinar for interested employers, including small businesses, to learn more about offering qualified educational assistance programs.
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