Can My Business Pay My Student Loans: 2026 Tax Rules

Your business can pay your student loans, but starting January 1, 2026, every dollar it sends to the loan servicer is treated as taxable wages to you. The tax-free provision that let employers cover up to $5,250 a year in student loan payments expired on December 31, 2025, and Congress has not extended it. That doesn’t mean there’s nothing left to work with. A permanent rule under the SECURE 2.0 Act lets your employer make matching retirement contributions based on your student loan payments, and if the coursework relates to your current work, some of the underlying education costs may be deductible as a business expense.

What Changed on January 1, 2026

From 2020 through 2025, the CARES Act temporarily expanded Section 127 of the Internal Revenue Code so employers could pay up to $5,250 per year toward an employee’s student loan principal and interest without either side owing tax on that amount. Congress extended it twice. It expired on January 1, 2026.¹

Section 127 itself is still on the books as a permanent program. Employers can continue to provide up to $5,250 per year in tax-free educational assistance for tuition, fees, books, supplies, and equipment.² The expiration only affects direct payments on student loan balances. If your goal is help with tuition for current coursework, that path is still open. If your goal is knocking down existing loan debt, the tax picture is very different now.

Tax Cost When the Business Pays Your Loans in 2026

When a business pays an employee’s student loans in 2026, the IRS treats the full amount as ordinary wages. It lands in box 1 of the W-2, and the business must withhold federal income tax plus the employee’s share of Social Security and Medicare.³ The employer owes its matching 7.65% on top, so payroll taxes alone take roughly 15.3% before income tax enters the picture.

The business still deducts the payment as compensation, so it lowers taxable income at the entity level. The employee is the one who feels the change. Someone in the 22% federal bracket who receives a $5,000 student loan payment nets around $3,500 after federal income and payroll taxes, compared to the full $5,000 they would have received tax-free under the old provision. At a 37% federal rate the gap widens further.

Structuring the arrangement differently doesn’t rescue it. Sending money directly to the servicer, reimbursing the employee, paying monthly, paying a lump sum — the IRS treats all of it as compensation. If the business is retiring your student debt, it’s paying you wages.

If You Own the Business, the 5% Rule Limits You

For a business owner hoping to have the company pay down personal student loans through a formal educational assistance plan, Section 127 treats self-employed individuals, sole proprietors, and partners as “employees” of their own business. But a separate limit inside Section 127 caps benefits going to owners: no more than 5% of the total educational assistance the business pays out in the year can go to shareholders or owners holding more than 5% of the company, including their spouses and dependents.²

The IRS has spelled out what this means in practice: if the owners are the only employees, they cannot receive educational assistance under Section 127 at all, because of the 5% benefit limitation.¹ A solo owner cannot set up a plan and pay their own tuition through it. The program must benefit a broader group of employees before the owner can draw anything from it.

Ownership is measured under the attribution rules of Section 1563, so stock held by your spouse, children, grandchildren, and parents counts as yours for the 5% threshold. Someone who personally holds 3% while a spouse holds another 4% is treated as a 7% owner and falls into the restricted class.⁴

The Best Remaining Tax-Advantaged Route: SECURE 2.0 Retirement Matching

The strongest option still available in 2026 doesn’t pay down your loan balance. It keeps you from falling behind on retirement while you handle the loans yourself. Under Section 110 of the SECURE 2.0 Act, an employer can make matching contributions to your 401(k), 403(b), or SIMPLE IRA based on your qualified student loan payments, even if you contribute nothing to the retirement plan.⁵

The practical picture: if the employer offers a 4% match and you direct 4% of your pay to student loans instead of into the plan, the employer still deposits 4% into your retirement account. The provision has been available for plan years starting after December 31, 2023, and it has no scheduled expiration date.

Which Loans Qualify

Not every payment counts. The loan must be a qualified education loan that the employee personally incurred for their own higher education, their spouse’s, or a dependent’s, and it must have been taken out while the student was enrolled at least half-time at an eligible institution. Payments on a parent’s refinanced loan or on a personal line of credit used for tuition don’t qualify.

Employees self-certify. The IRS requires five pieces of information each year: the payment amount, the payment date, confirmation the employee made the payment, that the loan is a qualified education loan used for qualified higher education expenses, and that the loan was incurred by the employee.⁵ Employers can rely on the annual certification without collecting loan statements.

How Much Can Be Matched

Your 401(k) elective deferrals combined with the qualified student loan payments used for matching cannot exceed the annual deferral limit, which is $24,500 for 2026.⁶ Age-50 catch-up contributions do not raise this cap for purposes of the student loan matching calculation. Matches based on student loan payments are also subject to the same nondiscrimination testing as regular matching contributions.

Deducting Work-Related Education as a Business Expense

A separate route exists under Section 162 of the Internal Revenue Code for education tied to your current work. If the coursework maintained or improved skills you need for your existing job, those education costs may be deductible as ordinary and necessary business expenses.⁷ This doesn’t turn the loan payments themselves into deductions. It can offset the original education costs if you haven’t already claimed them.

Two disqualifying tests apply. The education cannot be something you needed to meet the minimum requirements of your current job, and it cannot qualify you for a new trade or business, even if it also improves your current skills.⁸ A marketing director taking advanced analytics courses to sharpen existing work would likely qualify. A paralegal going to law school would not, because the degree opens an entirely new profession no matter how much it also improved their paralegal work.

The “new trade” disqualification is the one that surprises people. Even education your employer required is not deductible under Section 162 if it qualifies you for a new trade or business.⁸

The Personal Student Loan Interest Deduction Still Exists

If you’re paying your own student loan interest, you can deduct up to $2,500 per year under Section 221. For 2026, the deduction phases out for single filers with modified adjusted gross income between $85,000 and $100,000, and for joint filers between $175,000 and $205,000. You cannot deduct interest that an employer already paid tax-free under Section 127.⁹

That no-double-benefit rule still matters if you’re filing or amending 2024 or 2025 returns where your employer covered some interest tax-free. In 2026 the overlap largely disappears, because employer payments are now taxable wages to you, and the deduction is available on interest you paid personally.

Putting It Together

If your business is yours and you’re the only employee, Section 127 was never the answer, and the expiration of the student loan piece changes nothing for you. If you have employees and want to help them with existing loans, expect that any direct payment in 2026 is going through payroll as wages. The retirement match under SECURE 2.0 is the cleanest tax-advantaged way to support employees carrying student debt, and for owners and employees alike, education tied to current work may still be deductible on the business side under Section 162. Anything beyond that is compensation, taxed like compensation.

1
Internal Revenue Service. Frequently Asked Questions About Educational Assistance Programs
2
Office of the Law Revision Counsel. 26 USC 127 Educational Assistance Programs
3
Internal Revenue Service. Reminder Educational Assistance Programs Can Help Pay Workers Student Loans
4
Office of the Law Revision Counsel. 26 U.S. Code 127 Educational Assistance Programs
5
Internal Revenue Service. Notice 2024-63 Guidance Under Section 110 of the SECURE 2.0 Act
6
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
7
Office of the Law Revision Counsel. 26 USC 162 Trade or Business Expenses
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eCFR. 26 CFR 1.162-5 Expenses for Education
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Office of the Law Revision Counsel. 26 U.S. Code 221 Interest on Education Loans