Can tuition reimbursement be used for student loans?

Introduction

Tuition reimbursement is a benefit offered by some employers to help employees pay for continuing education and training. However, there has been some confusion over whether can tuition reimbursement be used for student loans and funds can also be used to pay down existing student loans. In this comprehensive article, we’ll take an in-depth look at how tuition reimbursement works, rules and restrictions on its use, and examine multiple strategies for whether and how it’s possible to leverage these funds toward your student loans.

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How Tuition Reimbursement Typically Works

Tuition reimbursement programs allow employees to take approved classes or training programs for career development and growth. The employee pays any tuition, fees, and materials costs upfront and then submits documentation after successfully completing the coursework. The employer then reimburses some or all of the approved costs.

Reimbursement is usually limited to a certain dollar amount per year, such as $5,250. There are often additional restrictions on what types of programs are eligible for can tuition reimbursement be used for student loans. For example, many employers will only reimburse for training and education directly related to the employee’s current job duties and business needs.

The reimbursement funds are intended to cover direct educational expenses like:

• Tuition and mandatory academic fees
• Books, supplies, equipment, and materials required for the course
• Certification exam registration fees
• Licensing fees

Employees receive the reimbursement as a tax-free employee fringe benefit when used for qualifying education expenses. This makes can tuition reimbursement be used for student loans a valuable perk compared to simply receiving the same amount as taxable bonus pay.

Some employers require employees to front the costs initially and seek reimbursement after course completion. Others will pay the costs directly to the education provider. Either way, the funds go toward current or planned future approved education expenses.

Can Reimbursement Funds Go Toward Student Loans?

In most cases, can tuition reimbursement be used for student loans, funds cannot be applied directly to an employee’s existing student loans. Here are some key reasons why:

Tuition reimbursement is intended to cover current or future educational expenses, not past expenses. Your outstanding student loans reflect education you already completed previously. IRS regulations state that employers can only provide reimbursement tax-free when it goes toward education that maintains or improves skills related to the employee’s current job. Paying down student loans for past education does not meet this job-related requirement.

Reimbursement must be tied to successfully completing approved courses and programs during employment. You don’t take any classes or training simply by making student loan payments.

While you generally can’t pay down, can tuition reimbursement be used for student loans debt or directly with tuition reimbursement funds, you may be able to use the benefit creatively to indirectly tackle your loans.

Strategies for Using Reimbursement for Student Loans

Even though you typically can’t directly apply tuition reimbursement dollars to your student loan balance, you can leverage the funds strategically to free up money in your budget to put extra toward loans. Consider these smart strategies:

Pay future education costs with reimbursement

• Use tuition reimbursement to pay for any additional training, certification, skills development, or degree programs you need to take in the future for professional growth.
• Paying these costs with reimbursed funds frees up money in your monthly budget that can instead go toward making extra student loan payments.

Reduce current education expenses

• If you are currently enrolled and paying for a work-approved degree or certificate program out of pocket, use reimbursement to cover as much of the costs as possible.
• This significantly reduces the tuition, fees, and materials costs you have to pay yourself each semester or term, enabling you to reallocate those savings to your student loans.

Build your emergency fund

• Many financial experts advise building up emergency cash savings before putting extra toward student loans.
• Use tuition reimbursement to cover career-advancing courses, training, or certifications. Put the money you would have spent on those costs into your rainy day fund.
• Once your emergency savings reaches a solid level, redirect those freed-up funds to make extra payments on your highest-interest student loans.

Pay down highest-interest loans first

• Make a list of your student loans ordered by interest rate, with the highest rate loan at the top.
• Use any money opened up in your budget thanks to tuition reimbursement to make extra payments focused on your most expensive debt first.
• This “debt avalanche” approach pays off loans quicker and saves you the most on interest charges over time.

Contribute to education savings for dependents

• If you have a child you plan to help pay for college someday, contribute the money freed up by reimbursement to a dedicated 529 education savings plan.
• This helps offset future tuition inflation and reduces the amount you’ll later need to borrow.

As you can see, even though tuition reimbursement can’t go directly toward student loan payments, you can use it to pursue strategies that create money to pay loans down faster.

Rules and Restrictions on Using Reimbursement

While tuition reimbursement provides valuable education funding, there are Internal Revenue Service (IRS) rules and employer-specific policies that dictate how the benefit can and can’t be used:

Reimbursement must be for courses and training that maintain or improve skills related to your current job duties. Education pursuing a future career change often won’t qualify.

Funds can only reimburse for approved expenses incurred during employment. It cannot cover education completed or costs paid prior to working there.

Employers set annual maximum reimbursement limits, often $5,250. Amounts over the limit become taxable income.

Programs may only approve classroom-style courses at accredited schools. Self-paced online courses or training may not qualify.

Reimbursement happens after successful course completion. You cannot get reimbursed for future expenses paid in advance.

Employers reserve the right to deny reimbursement requests for employees not meeting grade or performance requirements.

You may have to remain with the company for a period after reimbursement, or pay back funds if you leave sooner.

Always clarify the specific tuition reimbursement policies with your employer’s human resources department before enrolling in courses. Follow the rules closely to maximize the value of this employer-provided benefit.

Tax Implications of Tuition Reimbursement

One key restriction to understand involves the tax-free status of can tuition reimbursement be used for student loans benefits:

Reimbursement up to $5,250 per year for qualifying education is not considered taxable income.

If your employer reimburses you for more than $5,250 in a calendar year, the amount above $5,250 is subject to being taxed as regular income on your W-2.

So you generally want to keep the total reimbursement you receive under the $5,250 threshold annually.

Some employers also issue reimbursement in excess of the limit, but then tax it appropriately so it is still helpful to the employee. But amounts over $5,250 lose the tax-free advantage.

As long as you follow the rules and use tuition reimbursement only for approved education expenses, the funds can provide an enormously valuable untaxed benefit to improve your career.

Conclusion: Leverage Reimbursement Creatively for Loans

So, can tuition reimbursement be used for student loans, well it cannot be applied directly to pay off student loans, with careful planning you can use this employer-provided benefit to open up extra money in your budget to put toward education debt. Make sure to follow reimbursement guidelines to keep the funds tax-free. 

Get creative within the rules to pursue strategies that maximize how much you can indirectly allot to student loans through freed-up money. With smart leveraging of employer tuition reimbursement, you can ramp up your progress on achieving financial freedom from student debt.

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