Employer Student Loan Repayment Is Now Permanent. Here Is What It Does to a RAP Payment.

Employers can now pay up to $5,250 a year toward an employee’s student loans, tax free, with no expiration date. That benefit is worth real money to your clients. It is also the one benefit most likely to be spent in a way that buys them nothing.

Here is what the rule actually says, what it does to a RAP payment, and the three places it quietly fails.

Can an employer pay an employee’s student loans tax free in 2026?

Yes. Up to $5,250 per employee per calendar year, and the benefit is now permanent. Under Internal Revenue Code section 127, an employer with a written educational assistance program can pay principal or interest on an employee’s qualified education loans, and the employee excludes that money from gross income entirely (26 U.S.C. 127).

The student loan piece started as a pandemic-era add-on for payments made after March 27, 2020, and it was scheduled to expire at the end of 2025. Section 70412 of the 2025 budget reconciliation law struck the expiration date. There is no sunset left to plan around.

Three mechanics worth knowing, all from the IRS guidance on these programs (IRS educational assistance FAQ):

• The plan must be written, and it must be a separate plan for the exclusive benefit of employees.
• Payment can go straight to the loan servicer or be reimbursed to the employee. Either route works.
• The loan has to be one the employee incurred for their own education. A parent’s PLUS loan for a child does not qualify.

One more limit that catches owner-operators: no more than 5 percent of the year’s total educational assistance dollars can go to owners or shareholders holding more than 5 percent of the business. A two-person practice cannot write a plan that pays only the founders.

Does employer student loan assistance raise a client’s RAP payment?

No, and this is the part clients do not expect. Because section 127 assistance is excluded from gross income, it never reaches adjusted gross income, and RAP payments are calculated from AGI. Your client’s employer can put $5,250 a year against the balance and the monthly payment does not move.

That is not a small technicality. RAP charges a flat percentage of AGI on a tiered ladder, so an extra $5,250 of taxable income can push a borrower across a tier boundary (34 CFR 685.209). Here is the same borrower run twice: once with the benefit excluded, as the law actually treats it, and once as if the same $5,250 arrived as taxable wages instead.

Plan	Assistance excluded (AGI $78,000)	If the same $5,250 were taxable wages (AGI $83,250)
RAP	$455 / month	$555 / month
IBR	$451 / month	$494 / month
Standard (10-year)	$965 / month	$965 / month

The $100 a month is only half the story. At $455 a month this borrower still has $61,779.69 forgiven at month 360. At $555 a month the loan amortizes and nothing is forgiven at all. One tier boundary, and the entire forgiveness outcome flips. That is the same cliff behavior we mapped in RAP payments by income.

So the benefit does two things at once: it retires principal, and it does it without touching the number that sets the payment. For a client sitting near a tier edge, that combination is worth more than the $5,250 face value suggests.

Does a $5,250 lump sum buy extra months of PSLF credit?

No. A borrower on an income-driven plan gets advance-payment credit only through their next annual recertification date, no matter how large the lump sum. The rule is explicit: a lump sum counts “for a period of months not to exceed the period from the Secretary’s receipt of the payment until the borrower’s next annual repayment plan recertification date” (34 CFR 685.219(c)(2)(iii)).

Run the arithmetic on the borrower above. At $455 a month, $5,250 looks like eleven and a half payments. If the employer drops it in eight months before recertification, the borrower gets credit for eight months, not eleven. The remainder pays down principal on a balance headed for forgiveness.

Two practical consequences. First, timing matters: a lump sum lands better right after recertification than right before it. Second, and more bluntly, principal paydown on a PSLF-track client is money spent reducing a balance the government was going to cancel. Same benefit, opposite value, depending entirely on which track the client is on. Our note on RAP and PSLF covers how those tracks diverge.

Nothing in the regulation requires the borrower personally to be the one who pays. What the regulation cares about is that the full scheduled amount due gets paid, on time, in a month the borrower was working full time for a qualifying employer. An employer paying the servicer directly satisfies that just as well as the borrower paying it.

Can a client still deduct interest the employer paid?

No. The IRS is direct about it: “You can’t deduct as interest on a student loan any interest paid by your employer after March 27, 2020, under an educational assistance program” (IRS Publication 970).

The logic is the ordinary no-double-benefit rule. The money was already tax free on the way in, so it cannot generate a deduction on the way out. If a client has an employer covering part of the loan and is also paying out of pocket, only the out-of-pocket interest feeds the deduction, and the servicer’s Form 1098-E will not sort that out for you. That is a reconciliation to do at tax time, not an assumption to carry. See the student loan interest deduction in 2026 for the rest of the limits.

What does the $5,250 cap cover, and when does it grow?

The $5,250 is one shared annual bucket, not a separate student loan allowance. Tuition, fees, books, supplies, equipment, and loan payments all draw from the same cap. A client taking $4,000 of tuition reimbursement this year has $1,250 left for loans.

The cap has been frozen at $5,250 since 1986. That changes: the amount is adjusted for cost of living for tax years beginning after 2026, rounded to the nearest $50. Practically, 2026 is the last year at a flat $5,250, and the first indexed figure applies to 2027. Anything above the cap in a given year is simply taxable wages, not a disqualifying event for the rest.

Which clients should be asking about this?

The clients who benefit most are the ones not on a forgiveness track: borrowers whose balances will actually be repaid, where every dollar of principal retired is a dollar they keep. For them $5,250 of tax-free principal is worth roughly $7,000 of gross salary at a 25 percent combined rate, and it does not raise their RAP payment by a cent.

The conversation is often simpler than advisors expect, because a lot of employees have the benefit and have never used it. It sits in the handbook next to tuition reimbursement. Two questions get you there: does your employer have a written educational assistance program, and does it list qualified education loans. If the answer is yes and the client is not on a forgiveness track, this is free money they are leaving on the table.

And if the client is on a forgiveness track, the answer flips. That is exactly the kind of call worth getting right before you make it, because the two paths point in opposite directions on identical facts.

Frequently asked questions

How much can an employer pay toward student loans tax free in 2026?

Up to $5,250 per employee for the 2026 calendar year, covering principal or interest on the employee’s own qualified education loans. That cap is shared with any tuition, fees, books, or supplies paid through the same educational assistance program, and it is adjusted for inflation for tax years beginning after 2026.

Does employer student loan repayment count as taxable income?

No, not up to $5,250 a year under a qualifying section 127 program. It is excluded from gross income, so it does not appear in adjusted gross income and does not raise an income-driven payment under RAP or IBR. Amounts above $5,250 in a year are taxable wages.

Do employer payments count as qualifying payments for PSLF?

A payment counts when the full scheduled amount due is paid on time for a month the borrower worked full time for a qualifying employer, and the regulation does not require the borrower to be the payer. But a lump sum on an income-driven plan earns credit only through the borrower’s next annual recertification date, so a large one-time employer payment does not translate into an equal number of PSLF months.

Is the employer student loan benefit going away after 2025?

No. The expiration date was repealed in 2025, and employer payments of student loan principal and interest are now a permanent part of section 127 with no sunset.

Sources

• 26 U.S.C. 127, educational assistance programs, including the $5,250 cap, the post-2026 inflation adjustment, the written plan requirement, and the 5 percent owner rule.
• IRS, Updates to frequently asked questions about educational assistance programs.
• IRS Publication 970, Tax Benefits for Education, student loan interest deduction limits.
• 34 CFR 685.209, income-driven repayment plans, including the Repayment Assistance Plan AGI tiers and the 360-month forgiveness term.
• 34 CFR 685.219, Public Service Loan Forgiveness, including the advance-payment credit limit.