Updated October 29, 2026. Quick answer: For 2026 an employer can pay up to $5,250 a year toward an employee’s student loans tax free under section 127, a single cap that covers tuition help and loan payments together. Public Law 119-21 section 70412 made loan payments a permanent part of the exclusion, and the Act indexes the $5,250 only for taxable years beginning after 2026.
More on the 2026 tax figures: the student loan interest deduction for 2026 and the education credit phase-out for 2026.
The 2026 cap
| Year | Most an employer can pay tax free | Source |
|---|---|---|
| 2026 | $5,250 | Section 127(a)(2); Rev. Proc. 2025-32, section 2, item .09 |
| Amount printed in the statute before indexing | $5,250 | 26 U.S.C. 127(a)(2) |
| Indexing starts | Taxable years beginning after 2026 | Section 127(d), added by section 70412 |
| Rounding once indexed | Nearest $50 | Section 127(d)(2), added by section 70412 |
The cap is written in the statute: “If, but for this paragraph, this section would exclude from gross income more than $5,250 of educational assistance furnished to an individual during a calendar year, this section shall apply only to the first $5,250 of such assistance so furnished.” The IRS repeated it when it explained the 2025 law: “The maximum exclusion amount of $5,250 will be adjusted for inflation for taxable years beginning after 2026.”
Why loan payments are inside the cap
Educational assistance includes “the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee”. Before the Act that clause applied only to earlier payments. Section 70412(a) strikes the words “in the case of payments made before January 1, 2026,” so the loan-payment clause no longer has an end date. The Act applies it to “payments made after December 31, 2025”, which is where 2026 begins.
How later years will be set
Section 70412(b) adds: “In the case of any taxable year beginning after 2026, both of the $5,250 amounts in subsection (a)(2) shall each be increased by an amount equal to” the amount times the cost-of-living adjustment under section 1(f)(3), with 2025 as the base year. The result is rounded: “If any increase under paragraph (1) is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.” Nothing in the statute adjusts the amount for 2026 itself.
Common mistakes
- Treating the loan help as a separate allowance. It shares the single cap with tuition and other educational assistance.
- Using a later year’s number for 2026. The indexing starts for taxable years beginning after 2026.
- Assuming loan payments stopped counting after 2025. The Act removed the end date.
Related: the 2027 employer student loan repayment limit, the 2027 student loan interest deduction, the 2026 FSA contribution limit, Form 1098-E boxes 1 and 2, and the 2026 tax brackets.
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Answer againSources
- 26 U.S.C. 127, Educational assistance programs (U.S. Code, 2024 edition, U.S. Government Publishing Office): www.govinfo.gov
- Internal Revenue Service, Rev. Proc. 2025-32, tax year 2026 inflation-adjusted amounts, as modified by the One, Big, Beautiful Bill Act: www.irs.gov
- Public Law 119-21 (One Big Beautiful Bill Act), July 4, 2025, enacted text (U.S. Government Publishing Office): www.govinfo.gov
Read from the primary documents linked above on October 29, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the IRS itself is the right place to confirm anything consequential.