Nonprofit Resources

Section 127 Plans Permanently Expanded to Include Student Loan Repayment

For many years, employers have been able to offer educational assistance programs (Section 127 plans) that exclude up to $5,250 in educational benefits per year from an employee’s taxable income. This employee benefit traditionally covered expenses for tuition, fees, books, supplies, and equipment necessary for classes.

During the COVID-19 pandemic, legislation temporarily expanded the permitted uses of Section 127 to include employer payments toward employees’ “qualified education loans” (student loan principal and interest). While those expansions were set to expire at the end of 2025, the One Big Beautiful Bill Act (OBBBA) signed into law in July 2025 made the student loan repayment portion of this benefit permanent, effective immediately.

Further, starting with taxable years after December 31, 2026, the $5,250 cap will be indexed for inflation and increase over time. Before the OBBBA, the amount of nontaxable educational assistance benefits was not indexed for inflation.

Qualifying and Non-Qualifying Expenses 

Under a Section 127 educational assistance program as permanently expanded by the OBBBA, qualifying expenses include:

• Tuition and fees for undergraduate and graduate courses
• Books, supplies, equipment, and other materials required for coursework (but typically not items retained after a course ends)
• Principal and interest payments on qualified student loans made by the employer on or after March 27, 2020

Non-qualifying expenses include: 

• Meals, lodging, and transportation
• Tools or supplies (other than textbooks) that the student can keep after completing the course of instruction. For example, payments for a computer that the taxpayer can keep are not a qualifying expense.
• Courses involving sports, games, or hobbies, unless they:
  • Have a reasonable relationship to the employer’s business, or
  • Are required as part of a degree program 

Steps for Employers to Implement or Update a Section 127 Plan

If your nonprofit wants to start or continue offering Section 127 educational assistance plans as an employee benefit, take the following steps to ensure compliance:

• Create a written plan that clearly defines eligibility, covered expenses, and benefit limits.
• Avoid offering other benefits in lieu of education. A Section 127 plan may not offer employees non-educational benefits.
• Adhere to the annual limits. The amount of assistance may not exceed $5,250 per year per employee. Benefits above that amount may be taxable.
• Meet the nondiscrimination requirements. The plan must satisfy nondiscrimination rules by not favoring officers, shareholders, or highly compensated employees over others. All eligible employees must be reasonably notified of the plan.
• Amend your existing plans to include student loan repayment. If you already have a Section 127 educational assistance plan, you may need to amend it to explicitly include student loan payments, if they are not already included.
• Update your communications, payroll, and reporting. Update your internal materials, employee handbooks, and open enrollment and other benefit communications to include student loan repayment and ensure employees understand the benefit. We also recommend ensuring that your payroll systems do not treat the payments as taxable wages and that the plan tracks the combined use of the $5,250 limit across educational assistance and student loan payments.

Why This Matters for Nonprofits

Offering educational assistance programs as a tax-free benefit can give your organization a powerful tool for recruiting and retaining talent in today’s competitive labor market. It also helps employees because receiving assistance up to the limit means they avoid paying income tax on that part of the assistance.

If your organization offers this employee benefit, it’s essential to plan for the administrative overhead involved, including plan design, tracking, and ensuring payroll and tax compliance and nondiscrimination. Because the limit will be indexed starting in 2026, you will also need to watch for IRS guidance on the new limits.

For more information on educational assistance programs, see the following resources:

Publication 15-B, Employer’s Tax Guide to Fringe Benefits

Publication 5137, Fringe Benefit Guide

Publication 970, Tax Benefits for Education – Chapter 10

 

Please contact us with questions or if you’d like assistance with this or other nonprofit tax issues.

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