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Tax-free Student Loan Assistance

Kortney Redick, CPA & Leanne Tarleton

8/10/2022

The CARES act made a temporary change to the way the IRS handles employer payments for their employees’ student loans. The student loan repayment assistance program allows employers to make payments directly to an employee’s loan lender. Before the CARES act, these payments were reported as income; employees and employers had to pay income taxes and payroll taxes.
Section 127 previously allowed employers to pay up to $5,250 per year for qualified education expenses tax-free but excluded student loan payments. The CARES act temporarily allows employers to pay up to $5,250 in loan payments each year, tax-free. This provision will be in effect until the end of 2025. Additionally, the CARES act allows the $5,250 limit to be split between loan payments and tuition payments. 
Employees will not have to pay income tax, and the employer will not have to pay payroll tax on the $5,250. Any amount paid above $5,250 for student loans and/or qualifying education expenses will be reported as income.