Section 127 Student Loan Repayment: How Tax-Free Employer Education Assistance Works

What is Section 127?

Section 127 is the tax code provision that allows employers to provide educational assistance to employees under a qualified educational assistance program. Historically, many employers used educational assistance for tuition, fees, books, supplies, and training. IRS guidance now confirms that employer-provided educational assistance benefits can also include payments of principal or interest on qualified education loans incurred by the employee for the employee's education.

The $5,250 exclusion

For 2025 and 2026, the IRS states that an employee's gross income does not include the first $5,250 of educational assistance benefits provided under a qualifying Section 127 program. After 2026, the exclusion amount is adjusted for cost-of-living increases. This matters because properly structured assistance can benefit the employee differently than a normal taxable bonus — but the program must follow the rules.

Basic requirements employers should understand

• Be a separate written plan.
• Provide educational assistance only to employees.
• Not discriminate in favor of highly compensated employees.
• Not provide more than 5% of benefits to certain owners/shareholders and their spouses/dependents.
• Not allow employees to choose cash or taxable benefits instead of educational assistance.
• Provide reasonable notice to eligible employees.
• Require substantiation that benefits were used for qualifying education expenses.

What Section 127 does not do

Section 127 does not automatically forgive loans. It does not automatically make every payment tax-free. It does not allow employers to ignore plan requirements. It does not remove the need for payroll, benefits, tax, and legal review.

How Relief IQ supports Section 127 implementation

• Create a structured intake process.
• Capture employee eligibility information.
• Organize loan and documentation data.
• Track annual benefit usage.
• Route plan-design questions to the right advisor.
• Provide CFO/HR dashboards.
• Build employee education materials.
• Maintain a clear audit trail of program participation.