IRS updates frequently asked questions about educational assistance programs
These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer’s specific facts and circumstances, and they may be updated or modified upon further review. Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so.
More information about reliance is available. These FAQs were announced in IR-2026-55.
Background on educational assistance programs
You may exclude educational assistance benefits from your gross income if they are provided under a section 127 educational assistance program and the amount does not exceed $5,250 (adjusted for increases in the cost of living for taxable years beginning after 2026). That means that you won’t have to pay any tax on the first $5,250 of those benefits per calendar year for 2025 and 2026 and your employer must not include those benefits in your wages, tips and other compensation shown in box 1 of your Form W-2. However, it also means that you can’t use any of those education expenses as the basis for any other deduction or credit, including the lifetime learning credit. If any benefits are received under a program that does not comply with section 127, or to the extent that benefits exceed $5,250 (adjusted for increases in the cost of living for taxable years beginning after 2026), those amounts are not excluded from gross income under section 127 although they may be excluded from income under section 117 or section 132 or deducted under section 162 or section 212 if the requirements of such section are satisfied.
Questions and answers on educational assistance programs
Q1. What is an educational assistance program?
A1. An educational assistance program is a separate written plan of an employer for the exclusive benefit of its employees to provide employees with educational assistance.
To qualify as a section 127 educational assistance program, the plan must be written, and it must meet certain other requirements. Your employer must tell you whether there is a section 127 educational assistance program where you work and the terms of any such program.
A sample plan for employers PDF is available. An employer may tailor its plan to include, for example, conditions for eligibility, when an employee’s participation in the plan begins and prorated benefits for part-time employees. However, a program cannot discriminate in favor of officers, shareholders, self-employed or highly compensated employees in requirements relating to eligibility for benefits.
Q2. What are educational assistance benefits?
A2. Tax-free educational assistance benefits under a section 127 educational assistance program include payments for tuition, fees, and similar expenses, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.
Beginning March 27, 2020, tax-free educational assistance benefits also include principal or interest payments on certain qualified education loans (as defined in section 221(d)(1) of the Code) incurred by the employee for the education of the employee. The payments of any qualified education loan can be made directly to a third party such as an educational provider or loan servicer or directly to the employee, and it does not matter when the qualified education loan was incurred. For more information on qualified education loans, see Qualified Student Loan in Chapter 4 of Publication 970, Tax Benefits for Education, which summarizes the definition of a qualified education loan (referred to as a “qualified student loan” in Publication 970).
Educational assistance benefits do not include payments for the following items:
- Meals, lodging or transportation.
- Tools or supplies (other than textbooks) that you can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that you keep).
- Courses involving sports, games or hobbies unless they:
- Have a reasonable relationship to the business of your employer, or
- Are required as part of a degree program.
An employer may choose to provide some or all of the educational assistance described above. The terms of the plan may limit the types of assistance provided to employees.
Q3. What is the total amount that can be excluded from gross income under section 127 of the Code per year?
A3. Under section 127, the total amount that can be excluded from gross income for payments of principal or interest on qualified education loans and other educational assistance combined is $5,250 per calendar year (adjusted for increases in the cost of living for taxable years beginning after 2026). For example, if an employer pays $2,000 of principal or interest on any qualified education loan incurred by the employee for the education of the employee, only $3,250 in additional educational assistance may be excluded from income under section 127.
If an employee seeks reimbursement for expenses incurred, only $5,250 (adjusted for increases in the cost of living for taxable years beginning after 2026) of the reimbursement may be excluded from the employee’s gross income during the calendar year, and the expenses must not have been incurred prior to employment (but see Q&A-4 regarding qualified education loans). “Unused” amounts of the $5,250 annual limit (adjusted for increases in the cost of living for taxable years beginning after 2026) cannot be carried forward to subsequent years.
Q4. What is a qualified education loan?
A4. A qualified education loan (as defined in section 221(d)(1)) is a loan for education at an eligible educational institution. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution as defined in section 221(d)(2) (cross-referencing section 25A(f)(2)). The Department of Education determines whether an organization is an eligible education institution. A loan does not have to be issued or guaranteed under a Federal postsecondary education loan program to be a qualified education loan.
For purposes of section 127, qualified education loans may be incurred by the employee prior to employment, and payments of principal and interest may be made by the employer in a subsequent year.
Q5. How can payments of qualified education loans be made?
A5. Depending on how a particular employer has designed its section 127 educational assistance program, an employer may provide payments of principal or interest on an employee’s qualified education loans (as defined in section 221(d)(1) of the Code) for the employee’s own education directly to a third party such as an educational provider or loan servicer, or make payments directly to the employee.
Generally, the payment by an employer of principal or interest on any qualified education loan incurred by the employee for the education of the employee under section 127 is only available if an employer amends the terms of its plan to include the benefit. If the plan is currently written to provide generally for all allowed benefits, then it is possible that the plan would not need to be amended to provide for the qualified education loan benefit.
Q6. Can student debt be reimbursed under a section 127 educational assistance program?
A6. Maybe. Student debt may consist of a variety of expenses. If the debt was incurred as a result of expenses that are permissible benefits under section 127 of the Code (such as tuition, books, equipment, qualified education loans, etc.), the employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy his or her debt. The reimbursed amounts are then excluded from the employee’s gross income, provided that the employee can substantiate the expenses to the employer.
AUTHOR: IRS
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