Educational Assistance Limit 2027: $5,250 Becomes $5,400 (Sec. 127)

Employer student loan repayment is one of the few workplace benefits that has spread quickly in the past five years, and nearly every program is built around the same number: $5,250 a year, the most an employer can hand an employee for tuition or loan payments without it showing up as taxable pay. That number has a strange history. Congress set it in 1986 and then never touched it again, so a benefit that covered a meaningful share of a year in college during the Reagan administration covers far less of one today. The short answer: starting in 2027 the cap rises with inflation for the first time, and on the data already published it lands at $5,400. The IRS has not printed it yet, but the arithmetic behind it is closed.

What the 2025 law changed

The exclusion lives in 26 U.S.C. § 127. Subsection (a)(2) says that if an employer’s educational assistance program would otherwise exclude more than $5,250 for an individual in a calendar year, only the first $5,250 is excluded. For most of its life, that was the whole story.

Section 70412 of Public Law 119-21, the tax law signed on July 4, 2025, did two things to the provision. First, it struck the phrase that limited employer student loan payments to “payments made before January 1, 2026,” which had been extended once since the CARES Act first allowed them in March 2020. Loan repayment is now a permanent part of section 127 rather than a provision living year to year. Second, it added a new subsection (d): for any taxable year beginning after 2026, the $5,250 amount is increased by the cost-of-living adjustment in section 1(f)(3), “determined by substituting ‘calendar year 2025’ for ‘calendar year 2016’,” and any increase that is not a multiple of $50 is rounded to the nearest multiple of $50.

The IRS rewrote its educational assistance FAQs in April 2026 to reflect both changes. Fact Sheet 2026-10 now describes the cap as “$5,250 (adjusted for increases in the cost of living for taxable years beginning after 2026)” and confirms $5,250 as the figure “for 2025 and 2026.” It does not give a 2027 number, because none had been computed when it was written.

Running the formula

The cost-of-living adjustment in section 1(f)(3) is a ratio of two averages of the chained CPI-U, the version of the consumer price index the tax code has used since 2018. The numerator is the average for the twelve months ending August 31, 2026. The denominator is the same average for “calendar year 2025,” meaning the twelve months ending August 31, 2025. That denominator is not an estimate: the IRS already used it to produce every 2026 inflation adjustment in Revenue Procedure 2025-32, and this site’s 2027 inflation adjustments tracker backs it out of that document at 177.1105 to 177.1135, a range that reproduces all eighteen 2026 figures tested against it.

The numerator closed on September 11, 2026, when the Bureau of Labor Statistics published the August reading of 185.739. The only open question is the one that hangs over every 2027 figure this fall: the BLS never published an October 2025 index, because data collection stopped during the government shutdown that month. Averaging the eleven published months gives 182.857; filling October with the midpoint of September and November gives 182.629. Against the 2025 base, that is an adjustment of 3.24 percent or 3.11 percent.

Applied to $5,250, those ratios produce an increase of $170.32 or $163.59. Both are closer to $150 than to $200, so both round to $150, and the cap becomes $5,400. The result only changes if the IRS were to use inputs that push the increase to $175 or more, which would take an adjustment of 3.33 percent. None of the defensible treatments of the missing month gets there. The calculation is in the site’s repository as a short script, and it is the same mechanism, base-year substitution included, that puts the new Form 1099-NEC threshold at $2,100 for 2027.

Forty years of a frozen number

The $5,250 figure has an exact origin. The Tax Reform Act of 1986, Public Law 99-514, section 1162(a)(2), substituted “$5,250” for “$5,000” in section 127(a)(2). Nothing in the statute adjusted it after that. The exclusion itself carried an expiration date for years and was renewed again and again, but the dollar figure never moved.

Inflation did. The CPI-U for all urban consumers averaged 109.6 in 1986. Over the eleven published months from September 2025 through August 2026 it averaged about 329.7, roughly three times higher. In today’s money, the 1986 cap is worth about $15,800. The new indexing clause does not try to recover any of that lost ground; it starts from $5,250 as the 2025 base and adds only inflation measured after that year. The first step, $150, is about 1 percent of the gap.

What $5,400 means on a paycheck

The value of the change depends on how close an employee’s benefit already sits to the cap, so it is clearest with numbers. Take an employer that pays $450 a month toward an employee’s student loans. Twelve payments come to $5,400.

In 2026, $150 of that is above the $5,250 limit and lands in box 1 of the employee’s W-2 as taxable wages. At a 22 percent federal bracket plus 7.65 percent for Social Security and Medicare, the employee owes about $44 on it, before any state tax. In 2027, the same $450 a month fits exactly under the projected cap and the full $5,400 is tax-free. An employee paid less often, or by a plan with a lower monthly amount, sees no change at all; the indexing only matters to people at or above the cap.

The cap applies to amounts furnished to an individual during a calendar year, not a plan year, and unused room does not carry forward. The IRS FAQ gives the example of an employer that pays $2,000 toward an employee’s loans: only $3,250 is then left for tuition or other assistance in 2026. Under the 2027 figure, the same $2,000 leaves $3,400. Because the year is the calendar year, a payment an employer makes in late December 2026 counts against the old $5,250 cap, and the same payment made in early January 2027 counts against the new one.

The owner exception, recomputed

Section 127 has a rule that matters to small businesses more than to anyone else: no more than 5 percent of the assistance an employer provides in a year may go to people who own more than 5 percent of the company, together with their spouses and dependents. The IRS FAQ turns that into a formula for a single owner-employee: take the total assistance provided to everyone else and multiply by 0.05263158, which is 5 divided by 95. The result, rounded down to the cent, is the most the owner can receive, but never more than the annual cap.

That last clause is where 2027 matters. For an owner to take the full $5,250 in 2026, the business has to provide $99,750 of educational assistance to non-owner employees. To take the full projected $5,400 in 2027, it has to provide $102,600. The FAQ draws the practical conclusion directly: if the owners are the only employees, they cannot receive any tax-free educational assistance at all.

What else stays the same

Indexing changes the number and nothing else. A section 127 plan still has to be a separate written plan for the exclusive benefit of employees, cannot discriminate in favor of officers, owners or highly compensated employees, and cannot offer employees a choice between the assistance and cash. Assistance still cannot pay for meals, lodging, transportation, tools that the employee keeps, or courses involving sports, games or hobbies unless they relate to the business or are part of a degree program. Loans still have to be qualified education loans taken out for the employee’s own education; payments on a loan for a child or a spouse are outside the exclusion.

The no-double-benefit rule also carries over. Section 127 says no deduction or credit is allowed for any amount it excludes, so student loan interest an employer pays tax-free cannot also be claimed through the student loan interest deduction, whose own income limits are indexed separately and rise to $90,000 single and $180,000 joint for 2027. Tuition covered by the exclusion cannot be counted toward the lifetime learning credit either. Separately, a 401(k) match on student loan payments under the SECURE 2.0 Act is a retirement-plan feature, not section 127 assistance, and does not use up any of the $5,400.

The calendar from here

The IRS confirmed the 2026 inflation adjustments in Revenue Procedure 2025-32, issued on October 9, 2025. Its 2027 counterpart is expected between mid-October and November 2026, and because section 127(d) runs through the same section 1(f)(3) mechanism as the brackets and the standard deduction, the educational assistance cap should appear in that document for the first time. When it does, this page will be updated with the official figure.

For employers, the timing collides with open enrollment and with plan documents that often hard-code $5,250. A plan written to cover “the maximum amount excludable under section 127” generally adjusts on its own; one that names the dollar figure does not, and would keep paying $5,250 until it is amended. For employees, the practical step is simpler: if your employer’s student loan or tuition benefit is already at the cap, ask whether it will move to the new limit in January. The companion projections for other 2027 workplace elections, including commuter benefits at $350 a month, the health FSA cap and the dependent care FSA, follow the same calendar.

Sources

• 26 U.S.C. § 127, including subsection (d) and the amendment notes for Public Law 119-21 § 70412 and Public Law 99-514 § 1162 — law.cornell.edu/uscode/text/26/127
• 26 U.S.C. § 1(f)(3) — law.cornell.edu/uscode/text/26/1
• IRS Fact Sheet 2026-10, Updates to frequently asked questions about educational assistance programs (April 2026) — irs.gov
• Rev. Proc. 2025-32 (2026 inflation adjustments) — irs.gov/pub/irs-drop/rp-25-32.pdf
• Bureau of Labor Statistics, chained CPI-U (SUUR0000SA0) and CPI-U (CUUR0000SA0) series — api.bls.gov/publicAPI/v2/timeseries/data/
• finbarrow, IRS 2027 inflation adjustments tracker — companion page for the shared CPI window