Employer Student Loan Repayment Tax Benefit Calculator (2026)
An employer can pay up to $5,250 per year toward an employee's student loans (principal and interest, paid to the lender or reimbursed to the employee) completely tax-free under IRC §127. The employee pays no federal income tax and no 7.65% FICA on it, and the employer skips its matching 7.65% FICA too. This was a temporary pandemic-era perk set to expire 12/31/2025 — the 2025 law (OBBBA / P.L. 119-21 §70412) made it permanent, with inflation indexing starting in 2027. Enter the benefit to see exactly what the employee and the employer save, how the shared $5,250 cap works with tuition assistance, and the high-earner and California wrinkles. Everything runs in your browser — nothing is uploaded.
For general information only — not tax, legal, or financial advice. This calculator shows the federal income-tax and FICA effects of an employer §127 educational-assistance benefit and the employer's matching-FICA saving, using 2026 figures ($5,250 cap; $184,500 Social Security wage base). It assumes a qualifying written plan is in place and the payments are for the employee's own qualified education loan. Confirm your own situation with your employer's benefits team and a tax professional.
The headline, and the two things people get wrong about it
What's true: $5,250 of employer student-loan repayment a year is genuinely tax-free — federal income tax and the 7.65% employee FICA, with the employer avoiding its 7.65% match. On the full cap that's about $1,557 saved by a 22%-bracket employee ($1,155.00 income tax + $401.63 FICA = $1,556.63) and $401.63 saved by the employer, versus paying the same $5,250 as a taxable bonus.
Mistake #1 — "it's a separate $5,250 on top of tuition assistance." No: tuition-type assistance and loan repayment share one $5,250 cap. If your employer already put $3,000 toward tuition, only $2,250 of loan repayment is tax-free this year; the rest is taxable wages.
Mistake #2 — "the employer always saves ~$402 per employee." Only for employees under the $184,500 Social Security wage base. For a highly paid employee already over it, the 6.2% Social Security portion is gone and the employer saves just 1.45% Medicare = $76.13. This calculator handles that straddle: enter the employee's other wages under Advanced.
Plan requirements — IRC §127(b)
The benefit is tax-free only if the employer maintains a qualifying educational assistance program. The statute requires all of the following:
- (b)(1) Written plan. A separate written plan of the employer for the exclusive benefit of its employees to provide educational assistance.
- (b)(2) Nondiscrimination. Benefits must not discriminate in favor of highly compensated employees (within the meaning of §414(q)) or their dependents.
- (b)(3) 5%-owner limit. No more than 5% of the amounts paid during the year may go to more-than-5% owners (or their spouses or dependents).
- (b)(4) No cash-out choice. The program must not give employees a choice between educational assistance and other taxable pay — it can't be an opt-in alternative to salary.
- (b)(5) No funding requirement. The program is not required to be funded.
- (b)(6) Notification. Reasonable notification of the program's availability and terms must be given to eligible employees.
The IRS provides a free sample written plan document in its educational-assistance FAQ. This calculator does not check plan qualification — it assumes a qualifying plan is in place.
No double-dipping on the interest — §127(c)(7) & §221(e)(1)
If your employer pays your student-loan interest tax-free under §127, you cannot also count that interest toward the up-to-$2,500 student-loan-interest deduction under §221. Section 127(c)(7) denies any other deduction or credit for an amount excluded under §127, and §221(e)(1) specifically bars the interest deduction "for which an exclusion is allowable under section 127 … by reason of the payment by the taxpayer's employer." Only the interest portion of a loan payment was ever §221-eligible; principal never was. So the excluded employer-paid interest is simply out of the §221 calculation.
California does not conform — the benefit is taxable there
Most states start from federal income and update their conformity regularly, so the §127 exclusion flows through and there's no state income tax on the benefit. California is the exception. Its static federal-conformity date predates the CARES Act clause that added student-loan repayment to §127, so while California conforms to the traditional tuition-type §127 exclusion, employer student-loan repayment is taxable wages for California personal income tax. Conformity bills have repeatedly failed — most recently AB 386, which failed on February 2, 2026. If you're a California employee, switch the state toggle to "California" under Advanced and enter your California rate to see the state tax that offsets part of the federal saving. Other static-conformity states may also tax it — check your own state.
How the numbers work
The 2025 law widely known as OBBBA (P.L. 119-21) — the same law behind this site's other 2025-tax-law calculators — made the student-loan-repayment piece of §127 permanent (§70412, effective for payments made after December 31, 2025) after it had been temporary since the CARES Act. Here's the two-sided math at the full 2026 cap, for a typical employee under the Social Security wage base:
- Employee income tax saved: $5,250 × your marginal rate (22% → $1,155.00; 24% → $1,260.00; 37% → $1,942.50).
- Employee FICA saved: $5,250 × 7.65% = $401.63 (6.2% Social Security + 1.45% Medicare) — Medicare-only above the $184,500 wage base.
- Employer FICA saved: $5,250 × 7.65% = $401.63, versus paying the same amount as taxable wages. No 0.9% Additional Medicare match (that's employee-only), and FUTA adds ~$0 because its $7,000 base is already used up.
Unlike the below-the-line deductions in this site's other 2025-law calculators, the §127 exclusion reduces your wages at the source — the amount never appears in Box 1, 3, or 5 of your W-2. So it also lowers AGI-driven figures (IRMAA, ACA subsidies, the §221 phase-out), not just your tax.
Indexing after 2026: starting in 2027 the $5,250 is inflation-adjusted (§127(d)); the increase over $5,250 rounds to the nearest $50 (it can round up). The official 2027 figure comes from the IRS annual inflation-adjustment Revenue Procedure (expected fall 2026), so this tool uses $5,250 until then rather than guessing.
A worked example: split between tuition and a loan
Say your employer's §127 program put $3,000 toward a class you took and you also want it to pay $3,000 toward your student loan, and you're in the 22% bracket earning $80,000. Because the two share one $5,250 cap, only $2,250 of the loan payment fits under the cap tax-free; the other $750 is taxable wages. On the $2,250 you save $495.00 income tax + $172.13 FICA = $667.13; on the $750 excess you owe $165.00 income tax + $57.38 FICA. Your employer saves $401.63 FICA on the full $5,250 it excluded and pays $57.38 FICA on the $750 excess. Move any tuition assistance down and more of the loan payment becomes tax-free — one cap, not two.
Common questions
Principal or just interest? Both. §127(c)(1)(B) covers "principal or interest on any qualified education loan," paid to the lender or reimbursed to you.
My own loans only? Yes — "for education of the employee." A Parent PLUS loan you took for a child, or a spouse's loan, doesn't qualify (that's narrower than the §221 interest deduction).
Does it lower my AGI? Yes — it's excluded from wages at the source, so it never enters your AGI, which helps AGI-driven items too.
Two employers, $5,250 each? No. The $5,250 is per individual per year across all employers; excess is reconciled at filing.
Is anything saved or uploaded? No — the calculator is fully client-side; your numbers never leave your browser.
Sources: 26 U.S.C. §127 — (a)(2) $5,250 cap, (b)(1)–(6) plan requirements, (c)(1)(B) loan-payment clause (made permanent by P.L. 119-21 §70412, effective for payments after 12/31/2025), (c)(7) double-benefit denial, (d) inflation adjustment; §3121(a)(18) FICA exclusion; §3401(a)(18) withholding exclusion; §221(e)(1) student-loan-interest double-benefit denial; IRS FS-2026-10 (combined-cap language, sample plan) and Pub 15-B (2026); SSA 2026 wage base $184,500; California non-conformity, Assembly Rev & Tax analysis of AB 386. (Page last reviewed: July 13, 2026.)