In the most recent COVID-19 relief bill, Congress has extended the employer tax-free contribution until January 1, 2026. Your employer can pay you (employee) directly or your lender up to $5,250/year tax-free for both you and the employer. The employee won’t need to pay income tax on the payments; the employer receives a payroll tax exclusion!
Section 2206 of the CARES Act allows a portion of student loan payments to be excluded from income, whether those payments are paid directly to the employee or to a lender (see quote in bold below). The income exclusion is up to $5,250 per year per employee, which will now be extended until January 1, 2026.
According to the IRS:
“Section 2206 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, expands the definition of educational assistance described in section 2 of Pub. 15-B to include certain employer payments of student loans paid after March 27, 2020, and before January 1, 2021. The exclusion applies to the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for the education of the employee. Qualified education loans are defined in chapter 4 of Pub. 970. For more information about the exclusion of education assistance payments, see Educational Assistance in section 2 of Pub. 15-B.”
What about PSLF? These payments can qualify for PSLF if paid directly to the employee (and then the employee pays their monthly amount under all the other PSLF requirements). If the employer pays the lender, it may also qualify. Historically, Federal Student Aid has allowed the employer to pay the lender and the employee to receive PSLF benefits during that time:
If I work for a qualifying employer and receive an employer-based student loan repayment benefit (e.g., a benefit under the Federal Student Loan Repayment Program), can I also receive Public Service Loan Forgiveness (PSLF) based on the same employment?
Yes. You may receive benefits under both an employer loan repayment plan, including the Federal Student Loan Repayment Program and the PSLF Program for the same period of qualifying public service.
Unless you are receiving student loan repayment benefits under one of the student loan repayment programs administered by the U.S. Department of Defense (DOD), if your employer makes a single lump-sum payment that covers multiple monthly student loan payments, the lump-sum payment will count as only one qualifying monthly payment and may result in your loan being paid ahead. If you make subsequent payments during a period when you are paid ahead, those payments will not count toward PSLF.
If you’re receiving student loan repayment benefits under a program other than one of the programs administered by the DOD and you’re working toward PSLF, ask your employer if the repayment benefit can be paid monthly, instead of being paid as a lump sum; you can receive credit for multiple scheduled monthly payments instead of just one.
Please check with your lender and Federal Student Aid for more details and confirmation of your own student loan payments or qualifications.