No Tax on Employer Student Loan Payments
Published August 8, 2025
On August 6, 2025, the Internal Revenue Service (IRS) reminded employers that student loan payments can be included as part of their educational assistance programs. Employers may pay up to $5,250 each year toward educational benefits.
The Federal Student Aid data indicates that an average student loan balance at graduation is $38,375. This loan amount will be lower for a bachelor's degree and higher for a master's or doctoral degree. The average student debt for a bachelor's degree is now $29,300. Because there are additional costs for a master’s degree, the average debt for those students is $66,000. Finally, the largest debts are generally for individuals who have attended medical school. The average debt for doctors who graduate after eight years of education is $264,000.
Student debt is generally lower for individuals who attend public universities. Since tuition is higher at private colleges and universities, attendees frequently graduate with larger debt.
The estimated total student loan debt is now approximately $1.77 trillion. This debt is spread among thousands of students. The average annual payment on student loans is $6,432. The Education Data Initiative reports that many borrowers take up to 20 years to pay off student loan debt. The approximate interest rate for student loans is currently 6.5%.
With substantial amounts of student loans, the employer loan payment is welcomed. The educational assistance of $5,250 is usually allocated towards tuition, books, or other educational expenses. However, the employer may allocate up to this amount to repay student loans. If the employer repays the student loan, the time for repayment of the loan balance may be greatly reduced.
Major Increase in Endowment Tax
The One Big Beautiful Bill Act (OBBBA) included a new provision that increases the endowment net investment income (NII) tax in 2026. Previously, there was a 1.4% tax on the endowments of some private colleges and universities. Commencing in 2026, the excise tax will increase for larger private colleges and universities.
Schools with student-adjusted endowments of $500,000 to $750,000 will still pay a 1.4% excise tax. However, colleges and universities with endowments that are between $750,000 to $2 million per student will pay a 4% tax on NII. Finally, large private colleges and universities with more than $2 million of endowments per student will pay an 8% tax.
In addition to the larger tax, OBBBA expands the types of income that will be taxable. If a private college or university has made loans to students, the interest income on the loans will be included.
Furthermore, there will potentially be royalty income included in NII. If federal funds were used to fund research that led to a patent, copyright or other intellectual property, then the university’s receipt of those funds will be included in NII.
OBBBA increased the enrollment threshold from 500 to 3,000 full-time equivalent students. The American Enterprise Institute estimates that approximately 20 private colleges and universities will pay the endowment tax.
The endowment tax may have a substantial impact on universities that conduct research and license products. The Association of University Technology Managers estimates that between 1996 and 2020, colleges created approximately 19,000 startups. Many colleges and universities retained some income from these startups.
There will be a requirement for Treasury regulations to define specific rules. Some colleges and universities receive royalties from grants from projects that were funded many years ago. The college or university had no idea when it accepted federal funding that it could later be subject to tax.
There may be planning efforts to attempt to reduce the tax implications of the new provisions. Colleges and universities, however, are often limited in their ability to spend down an endowment. A substantial percentage of college and university endowments are dedicated to scholarships, faculty positions or other specific purposes. Most colleges and universities will not be able to reduce their endowments to pay a lower NII.
The Treasury Department was also instructed to make it difficult for private colleges and universities to avoid the tax through "the restructuring of endowment funds or other arrangements."
Editor's Note: The estimated 20 colleges and universities are expected to pay excise taxes of $761 million over ten years. Finance departments of these colleges and universities will need specific guidance from Treasury to calculate the correct tax amounts.
Microcaptive Insurance "Close Call"
In CFM Insurance Inc. et al. v. Commissioner; No. 10703-19; No. 10704-19; T.C. Memo. 2025-83, the Tax Court determined a microcaptive insurance company failed the Section 831(b) definition. Premiums were therefore not deductible by the business owners.
Angelo and Romana Caputo were immigrants from Italy. They founded Caputo's New Farm Produce (Caputo’s) in Illinois. Their daughter Antonella married one of the employees, Robertino Presta. Angelo and Romana retired in 1988, and Antonella and Robertino continued to grow the business. They expanded to multiple stores, purchased shopping centers and increased the revenue of the business.
Caputo’s purchased multiple types of commercial insurance. In 2012, insurance broker Steve Gabinski suggested they consider creating a captive insurance company with Artex Risk Solutions, Inc. as the managing entity. They created a captive insurance company named CFM with the business regulated in Utah. CFM consisted of a four-person board which included Robertino, Antonella, their son Giancarlo and a Utah attorney.
CFM policies included multiple different coverages and had premiums of $1,199,136 or similar amounts that were under the $1.2 million microcaptive limit under Section 831(b).
Artex was the claims administrator but did not have written guidelines and initially did not have licensed claims adjusters. Caputo's submitted no claims for 2012 or 2013 and only two claims in 2014. Artex handled these claims in an unusual manner. They were paid before Caputo's submitted a notice-of-claim form or before CFM authorized payment.
The IRS audited and claimed the Section 831(b) election was not valid because it was not insurance "within the meaning of federal tax law."
A microcaptive insurance company is permitted if premiums are not more than $1.2 million per year. The insurance premiums for qualified microcaptives are deductible as ordinary and necessary business expenses under Section 162(a).
The IRS claimed CFM was not a qualified insurance company. The taxpayer noted that it is subject to regulation in Utah under the McCarren-Ferguson Act. Therefore, the taxpayer argued that the Tax Court must recognize CFM is qualified as insurance under Utah law and the tax deductions are appropriate.
The Tax Court noted that there was insurance regulation under the Utah law. However, the Tax Court and federal law still determined whether there was a federal income tax deduction.
Insurance must involve a transaction that has "shifted risk, distributed risk, involved insurance risk and met the commonly accepted notion of insurance." The IRS conceded there was insurable risk and risk-shifting. The question was whether the standard is met for distributed risk and the commonly accepted notion of insurance.
A microcaptive attempts to distribute risk by creating multiple risk exposures. Caputo’s insured 2,000 pieces of equipment, sold more than 50,000 different products, had over 1,000 employees and 300 suppliers. Because there were multiple stores and significant risks, the Tax Court determined the policies were sufficiently independent and distributed risk.
The primary question is whether or not this was insurance. An insurance company generally does not exist if the entity "charged unreasonable premiums, issued valid and binding policies…only after the coverage period, handled claims in an irregular way or had no or few employees."
CFM did not consider a history of losses in setting premiums. Many of the CFM policies had conflicting terms. They failed to define the criteria to determine if losses were covered. There was no standard procedure for processing claims. The claims were handled by CFM in "an unusual way." Some claims were paid before the notice-of-claim form was submitted.
The operation of CFM was managed to benefit Caputo's. This is contrary to the regular practices of an insurance company. In addition, Robertino Presta was 50% owner of CFM and at trial forgot that he had appointed himself as CFM President. The Tax Court stated it was a "much closer call than is usual in microcaptive cases, but in the end we find by a preponderance of the evidence that CFM was not offering something that would be commonly accepted as insurance."
The IRS also assessed Section 6662(a) penalties. However, taxpayer accountant Hamilton Kwon had significant access to all CFM records. Therefore, the good faith defense was accepted and there were no penalties.
Applicable Federal Rate of 4.8% for August: Rev. Rul. 2025-14; 2025-32 IRB 1 (15 July 2025)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2025. The AFR under Sec. 7520 for the month of August is 4.8%. The rates for July of 5.0% or June of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
