2024 School Update: Section 27K Taxability

The Michigan Department of Education announced the opening of the Section 27K Student Loan Repayment Program.  According to the guidelines, educators who are currently enrolled in and making payments toward a federal loan forgiveness plan and who are working directly with students at least 32 hours per week are eligible.

In accordance with Michigan Compiled Law (MCL) Section 388.1627K, eligible program participants shall receive up to $200 per month, or $400 per month if their employer is assigned to Band 6 in the opportunity index, as described in MCL Section 388.1631a.  “Band 6 in the opportunity index” means at least 85% of pupils in the district or intermediate district are economically disadvantage pupils.

With the additional funding flowing to employees comes the question of taxability of the Student Loan Repayments.  In accordance with IRS Publication 970 Chapter 10, employer provided educational assistance benefits include payments made after March 27, 2020, and before January 1, 2026, for principal or interest on any qualified education loan incurred for the employee’s education.    An employee can exclude up to $5,250 of these benefits each year if their employer provides an educational assistance program.  This means the employer shouldn’t include those benefits with an employee’s wages, tips and other compensation shown in box 1 of your Form W-2.  This also means that the employee doesn’t have to include the benefits on their individual income tax return.

For an employer to have a qualifying educational assistance program, the plan must be written and must meet certain other requirements.  A qualified educational assistance program is commonly referred to as a Section 127 plan.  If the employer does not have a written plan, or if the employer provides assistance exceeding $5,250, the employer must include the value of these benefits as wages.

To simplify administration and ensure compliance, it is advisable to integrate the Student Loan Repayment into the employer’s payroll system. This approach facilitates efficient tracking, particularly if the repayment amount exceeds the exemption threshold.