Student Loan Repayment Benefit: Two Ways to Offer It
Two employer student loan repayment benefits: tax-free Section 127 payments up to $5,250 a year, and a retirement match on loan payments.
The first time somebody on my team asked whether we could help with her student loans, I said yes before I understood what I was agreeing to. I assumed a student loan repayment benefit was one thing. It is two things, they work nothing alike, and choosing the wrong one wastes the money.
One route pays cash against the balance and keeps it out of taxable wages. The other pays nothing against the balance and instead puts an employer match into a retirement account, on the reasoning that somebody servicing debt cannot afford to defer salary. Employers routinely describe one while budgeting for the other.
This covers what each route is, the current dollar limit and whether it still expires, what a written plan must contain, how an employee certifies payments to earn a match, how that match affects nondiscrimination testing, and how to choose.
I build the people and records tooling for businesses without an HR department at FirstHR, which is an onboarding and HR platform rather than a payroll or retirement plan provider. This is general information, not tax or legal advice.
What the Benefit Is
A student loan repayment benefit is an employer program that directs money toward an employee’s education debt, or toward their retirement in recognition of it. Two legally distinct versions exist and they are not interchangeable.
The confusion is understandable because the marketing language is identical. Both get described as helping employees with student loans, but only one sends money to a lender, and an employee expecting a smaller balance who receives a retirement contribution will not feel helped.
The Two Routes Employers Confuse
Route one pays the lender and stays out of taxable wages. Route two pays the retirement account and leaves the loan untouched. Here is the whole distinction on one screen.
Route two needs an existing retirement plan, an amendment, and a recordkeeper (the provider that administers the plan) willing to support the feature, so it is not a decision you can make this quarter without a plan already running.
Route one needs a plan document and a payroll code, but it also needs new cash out of the business, this year, per participating employee. A match on loan payments is money already committed to people who were not claiming it, which is a very different budget line.
Route One: Direct Payment Under Section 127
Under a written Section 127 educational assistance program you may pay principal or interest on an employee’s qualified education loan and exclude the payment from their gross income. The payment can go to the employee or straight to the lender, and the statute treats both identically.
The governing text is 26 U.S.C. 127, which defines educational assistance to include an employer’s payment of principal or interest on any qualified education loan the employee incurred for their own education.
Two details matter more than they look. Principal and interest both count. And per the current IRS question set on educational assistance programs (Fact Sheet 2026-10), the loan may have been incurred long before the employee met you, which makes this usable in an offer to a recent graduate.
The payroll treatment is the part worth telling your bookkeeper twice. Benefits excluded under a Section 127 program sit outside federal income tax withholding, Social Security, Medicare, and federal unemployment tax (FUTA), per IRS Publication 15-B, and the excluded amount stays out of box 1 of the employee’s Form W-2.
The same $5,250 pot covers tuition assistance, so if you already run tuition reimbursement, loan payments share that ceiling rather than adding a second one. That is the accounting error to watch for here, and it produces a taxable surprise in December.
The tracker below is what stops that. One row per employee per calendar year, with both kinds of assistance drawing on the same limit, and a payment log underneath it.
| A | B | C | D | E | F | G | H | I | |
|---|---|---|---|---|---|---|---|---|---|
| 1 | Employee | Calendar year | Annual limit in force | Tuition assistance to date | Loan payments to date | Total furnished | Room remaining | Next payment scheduled | Notes |
| 2 | SAMPLE A. Rivera | 2026 | 5250 | 0 | 4000 | 4000 | 1250 | Paid to the servicer; tuition room left this year | |
| 3 | |||||||||
| 4 | |||||||||
| 5 | |||||||||
| 6 | |||||||||
| 7 | |||||||||
| 8 | |||||||||
| 9 | |||||||||
| 10 | Check | One row per employee per calendar year, because the limit is per calendar year | |||||||
| 11 | Check | Tuition assistance and loan payments draw on the same limit, not one each | |||||||
| 12 | Check | Unused room does not carry forward into the next year | |||||||
| 13 | Check | Anything above the limit is ordinary taxable wages, so flag it before the last pay run |
The Limit, the Sunset, and the Indexing
The exclusion is $5,250 per employee per calendar year, the student loan piece now has no expiry date, and the amount is adjusted for inflation for taxable years beginning after 2026. The last two changed with legislation enacted in July 2025, so guidance written before then is out of date on both.
Read the timing carefully, because it sets your budget. The $5,250 figure holds for 2026. It can first move for the next tax year, and only once the IRS publishes the adjusted amount in its annual inflation guidance. Until then, plan on $5,250.
The permanence matters more than the indexing. A benefit with an expiry date cannot go into a job offer, because you would be promising something you might have to withdraw. A benefit with no sunset can be written into an offer letter, which is a categorically different tool.
What a Written Section 127 Plan Requires
The exclusion is conditional, not automatic. It depends on the assistance being furnished under a separate written plan that meets five statutory requirements, and missing any one turns the payment into ordinary taxable wages. The statute adds one relief: the plan need not be funded.
None of the five is expensive. What they cost is decisions: a fixed annual amount per employee, who is eligible and after how long, whether you pay the lender or reimburse the employee, and what happens when somebody leaves mid-year. That is an afternoon, once.
Once the plan exists, the notification requirement is the one people treat as optional. A plan sitting unread in a shared drive fails it, and also fails to buy you anything, which makes this a benefits communication problem as much as a legal one.
Route Two: A Retirement Match on Loan Payments
The SECURE 2.0 Act lets a retirement plan treat an employee’s qualified student loan payments as if they were elective deferrals (the pay an employee chooses to put into the plan) for matching purposes. The employee pays their lender, tells you they did, and receives the match they would have received had they deferred the same amount.
The problem it solves is real. Somebody putting $400 a month against a balance usually cannot also defer 4 percent of pay, so they receive no match and fall further behind colleagues who can. This closes the gap without asking them to choose.
| Feature | How it works |
|---|---|
| Plan types | 401(k), 403(b), governmental 457(b), and SIMPLE IRA plans. Optional, and needs a plan amendment |
| What qualifies | A payment the employee is legally obligated to make on a qualified education loan, for higher education expenses of the employee, spouse, or dependent |
| Annual ceiling on payments counted | The section 402(g) elective deferral limit, or the employee’s compensation if lower, reduced by deferrals actually made. SIMPLE IRA plans run on their own lower dollar amount instead |
| Match rate and vesting | Both must be identical to the treatment of elective deferral matches |
| Eligibility | Everyone eligible for the deferral match must be eligible for the loan payment match, and the reverse |
| Funding frequency | May differ from the deferral match, but must be at least annual |
| Where the money goes | Into the retirement account. Nothing reaches the loan balance |
The ceiling in that table deserves a sentence of its own, because it is where employers overpromise. A payment counts only to the extent it fits under the section 402(g) limit, which IRS Notice 2025-67 sets at $24,500 for 2026.
The section 402(g) limit is the yearly cap on what an employee can defer from pay. The employee’s own deferrals use up that room first, and the employee’s pay is the cap if it is lower.
The definition of a qualified education loan comes from 26 U.S.C. 221, the same definition used for the student loan interest deduction. Ordinary federal and private education loans qualify. A loan from a related person or from a retirement plan does not, and neither does a loan that also paid for things other than qualified education expenses.
A credit card balance can count as well. IRS Publication 970 treats interest on a card used only to pay qualified education expenses as student loan interest, which means the balance itself is a qualified education loan under the same definition.
Two constraints catch employers off guard. The match rate must equal your existing rate, so this is not a place to economize. And the plan cannot limit the feature to loans for the employee’s own education, because a loan the employee incurred for a spouse’s or a dependent’s education counts too.
If you already run a safe harbor 401(k), the feature can be added mid-year where the notice and election requirements are satisfied.
How Employees Certify the Payments
The employee certifies their loan payments annually, and the plan may rely on that certification without independent verification. That single rule is what makes the feature administrable at a small company.
The five items a certification must cover are set out in IRS Notice 2024-63, which remains the operating manual for this provision until proposed regulations arrive.
| What must be certified | How it can be certified |
|---|---|
| The amount of the loan payment | Affirmative or passive certification, or independent verification where the employer holds the data |
| The date of the loan payment | Affirmative or passive certification, or independent verification |
| That the employee made the payment | Affirmative or passive certification, or independent verification |
| That the loan is a qualified education loan used for qualified higher education expenses | Affirmative certification |
| That the loan was incurred by the employee | Affirmative certification |
The design point hiding in that table is that the last two items need not be recertified every year. An employee registers a loan once, affirms those two facts once, and afterward only the payment details refresh. That turns an annual interrogation into an annual confirmation.
You also set the deadline. A plan may impose a reasonable claim deadline, and three months after the plan year ends is given as an example. A firm date stops somebody turning up a year late with a stack of lender statements and expecting a contribution.
How It Interacts With Nondiscrimination Testing
A plan may run the actual deferral percentage test separately for the group of employees who receive matches on their student loan payments. For a small plan that is not a technicality, it is frequently the most valuable part of the provision.
Employees carrying student debt are often the ones deferring least, and a plan fails testing when the lower-paid group defers far less than the owners. Moving that group into a separate test changes the arithmetic, and can move a plan from failing to passing without anybody changing their behavior.
Two limits on the good news. The separate testing rules do not reach SIMPLE IRA plans, which have their own structure. And a plan that already passes comfortably gains nothing, the same trap employers fall into when they adopt a startup 401(k) design to solve a problem they never measured.
As for timing, Notice 2024-63 applies for plan years beginning after December 31, 2024, and the IRS announcement that released it says proposed regulations are planned. That is a reason to keep the amendment flexible rather than a reason to wait.
Dwight SchruteSales3 people
Darryl PhilbinWarehouse1 person
Kelly KapoorCustomer Service1 personHow to Choose Between Them
Choose on which problem your people have. Direct payment shrinks a balance somebody is anxious about right now. A retirement match fixes a savings gap they will not feel for thirty years.
| Dimension | Section 127 direct payment | Retirement match on loan payments |
|---|---|---|
| Prerequisite | A written plan document, nothing else | An existing plan, a willing recordkeeper, an amendment |
| Cash cost | New money out of the business | Money already budgeted but not being claimed |
| Effect on the loan | Balance falls immediately | None at all |
| Tax to the employee | Excluded from wages within the annual cap | Deferred until distribution |
| Annual ceiling | $5,250, shared with tuition assistance | Deferral limit, or pay if lower, less actual deferrals |
| Who benefits | Anyone with a qualifying loan, including new hires | Only plan-eligible employees who have loans |
| Perceived value | Immediate and obvious | Real but abstract, and needs explaining |
| Owner participation | Limited by the 5 percent owner rule | Owners participate on the same terms |
| Testing effect | None | May allow separate deferral testing |
For most small employers the honest recommendation is route one first. It needs only a plan document, it works without a retirement plan, and the employee sees the effect on a statement within a month. The retention effect of a visible benefit beats the same money delivered where nobody can see it.
Route two earns its place in two situations: when you already pay a match that half the team never claims, and when your plan is failing or close to failing its deferral test. In the second case the separate testing option can be worth more than the contributions.
The combination to avoid is announcing route two while your team hears route one. Employees told the company will help with their student loans, who then find the help lands somewhere they cannot touch, feel misled. Repairing that costs more than the benefit was worth.
How a Small Employer Actually Runs Either One
Both programs are lighter to administer than employers expect. The work is front-loaded into setup and then reduces to a form and a payroll code.
Keep the plan document, the annual certifications, the payment records, and the notification you sent employees. If the treatment of these payments is ever questioned, the file is the answer, and reconstructing it two years later is not realistic.
Where Small Employers Get This Wrong
Five patterns come up repeatedly, and the first costs the most.
Paying without a written plan is first. An employer wires $3,000 to a loan servicer as a kindness, no document exists, and the payment is taxable wages with payroll tax on both sides. The generous act creates a tax bill for the person it was meant to help.
Treating the cap as two caps is second. Tuition assistance and loan payments share one annual ceiling per employee, and running both without a combined tracker produces an excess that is ordinary taxable wages.
Promising the retirement match before checking the recordkeeper is third. The feature is optional for plans and support varies. Announcing it and then finding your platform cannot administer the certification makes every future benefits announcement land softer.
Assuming the money reaches the loan is fourth. Under route two it does not, and the employee will find out. Say it plainly: this goes into your retirement account, your balance is unaffected, and here is why it is still worth having.
Budgeting the maximum is fifth. Participation is usually lower than headcount, so a program capped at the statutory maximum rarely costs the maximum. That is an argument for starting, not for a smaller cap, and it repeats across a small business benefits package.
Nick Anisimov, FirstHR founderA student loan program is not a substitute for pay, and describing it as one invites a comparison it will lose. Presented alongside the rest of your fringe benefits, it does what it is good at: reaching a specific group with unusually efficient money.
Your next step is the cheapest one. Ask your team whether student debt is a real problem, then pick the route that matches the answer.
Frequently Asked Questions
Can an employer pay off an employee’s student loans tax-free?
Yes, within a limit and only under a qualifying written plan. Under Section 127 of the Internal Revenue Code, an employer can pay principal or interest on a qualified education loan, either to the employee or directly to the lender, and the employee leaves that amount out of gross income up to the yearly cap. Neither side owes Social Security or Medicare tax on it, and the business can generally deduct the cost. What makes it work is a separate written educational assistance plan that meets five statutory requirements. An informal payment made out of goodwill does not qualify and is treated as ordinary taxable wages.
How much can an employer pay toward student loans tax-free?
Up to $5,250 per employee per calendar year for 2026. The ceiling is shared: tuition assistance and loan payments count against the same annual amount, so if you pay $3,000 toward one person’s loans, only $2,250 of tuition help stays tax-free for that person in the same year. Room you do not use disappears at year-end instead of carrying forward, and any amount above the cap is ordinary taxable wages unless another exclusion covers it. Inflation indexing, rounded to the nearest $50 and measured from calendar year 2025, begins with taxable years after 2026. Until the IRS announces an adjusted amount, budget on $5,250 and do not promise a bigger tax-free figure.
Is the employer student loan repayment exclusion permanent?
Yes. The student loan piece of Section 127 began in 2020 as a temporary measure, and its sunset had been pushed out to January 1, 2026. Legislation enacted in July 2025 removed that end date, so the current text of 26 U.S.C. 127 places no date restriction on employer payments of principal or interest. That law also added an inflation adjustment for taxable years beginning after 2026. Permanence is what lets you build a multi-year offer around the benefit instead of treating it as a novelty. Plenty of published guidance still says the provision expires at the end of 2025, and that guidance is out of date.
Do you need a written plan to pay student loans tax-free?
Yes. Without a separate written plan the exclusion does not apply, and the plan is the requirement employers most easily overlook. It must exist for the exclusive benefit of employees. It cannot favor highly compensated employees, cannot send more than 5 percent of its benefits to owners holding more than 5 percent and their families, cannot let employees take cash instead, and must be communicated to eligible employees in a reasonable way. No trust or funding is required. The IRS offers a sample plan you can start from, so the drafting itself is easy. The real work is deciding who is eligible, how much each person can receive, and how claims are handled.
What is a student loan 401(k) match?
It is a provision of the SECURE 2.0 Act that lets a retirement plan count an employee’s qualified student loan payments as if they were elective deferrals when it calculates the employer match. An employee who cannot afford to defer salary still receives the match, based on what they paid their lender. The feature is optional, needs a plan amendment, and covers 401(k), 403(b), governmental 457(b) and SIMPLE IRA plans. The loan payment match has to use the same rate, vesting schedule, and eligibility rules as the regular match, and a loan taken for a spouse’s or dependent’s education must count too. Nothing is paid toward the loan itself, which is the easiest part of the design to misunderstand.
How does an employee prove they made student loan payments?
By an annual certification, which the plan may rely on without independent verification. IRS Notice 2024-63 lists five items the certification covers: the amount of the payment, its date, that the employee made it, that the loan is a qualified education loan used for qualified higher education expenses, and that the employee incurred the loan. Affirmative or passive certification, or independent verification where the employer already holds the data, can cover the first three. The last two only need to be certified once, when the employee registers the loan, instead of every year. The plan can also set its own reasonable cutoff for submitting claims, and the notice offers three months after the plan year ends as an example.
How does the student loan match affect nondiscrimination testing?
Favorably, which is much of why the provision exists. A plan may run the actual deferral percentage test separately for the employees who receive matches on their loan payments, choosing between two methods described in IRS Notice 2024-63. Staff paying off student debt frequently defer the least, so moving them into their own test can improve the main test result for the rest of the plan. For the contribution percentage test, the loan payment matches still count as ordinary matching contributions. A safe harbor plan can add the feature during the year if the notice and election requirements are met. SIMPLE IRA plans fall outside the separate testing rules.
Can you offer both a Section 127 program and a student loan match?
Yes, and neither one reduces the other. Each sits in a separate part of the tax code with its own limit, and each delivers value in a different place. In a single year, an employee could get $2,000 in tax-free loan payments under an educational assistance program and also receive a plan match calculated on the loan payments they made themselves. For a small employer, though, there is rarely a budget case for launching both at once. Start with direct payment: it works without a retirement plan, a recordkeeper, or an amendment, and the employee sees the loan balance drop within a month.
Make HR the easy part of running your business
Onboarding, e-signatures, training and core HR in one place. Up and running in 5 minutes.
- 7-day free trial
- No credit card required
- Cancel anytime