Educational Assistance Programs Can Be Used to Help Repay Student Loans

The IRS issued a reminder on Wednesday, telling employers that offer educational assistance programs that their employees can still use them to help pay student loan obligations through December 31, 2025.

Traditionally, educational assistance programs have been used to pay for books, equipment, supplies, fees, tuition and other educational expenses, but these programs can also be used to pay principal and interest on employees’ qualified education loans. Payments made directly to the lender, as well as those made to the employee, may qualify, according to the IRS.

This option to use educational assistance programs to pay for workers’ student loans has only been available on payments made after March 27, 2020. The student loan provision is currently set to expire December 31, 2025.

The IRS noted that in most cases, educational benefits, including educational assistance programs, are excluded from federal income tax withholding, Social Security tax, Medicare tax and federal employment tax. By law, the tax-free benefits of an educational assistance program are limited to $5,250 per employee per year. Assistance provided greater than that level is normally taxable as wages.

For employers interested in offering an educational assistance program, the IRS stated that these programs must be laid out in writing as a company benefit and cannot discriminate in favor of highly compensated employees.

More information on fringe benefits, including educational assistance programs, can be found on the IRS website. Qualification details for students can be found here.

The IRS last week also offered interim guidance on student loan matching payments, as permitted under the SECURE 2.0 Act of 2022. The notice explained rules for employers with 401(k), 403(b) and governmental 457(b) plans to provide retirement plan matching contributions based on qualified student loan payments, rather than based only on elective contributions to retirement plans.

The IRS is taking public comments on the student loan matching payment notice, which applies to plan years beginning after December 31, 2024. The comment period runs for 60 days after the notice is published in the Federal Register.

The same day the IRS issued its reminder on student loan assistance, the Supreme Court refused to reinstate the student loan repayment plan of President Joe Biden’s administration, Saving on a Valuable Education. The Supreme Court turned down a request from the Biden administration to put the plan back in play after lower courts blocked it this summer. The plan offers lower monthly student loan payments and a faster path to loan cancellation for millions of loan borrowers. Currently, more than 8 million people are enrolled in the program, with debts already cleared for more than 400,000 borrowers. Ongoing litigation and a hold issued by the U.S. 8th Circuit Court of Appeals have stalled the SAVE program, as the Biden plan is known.