Section 27k Student Loan Repayment Program for Districts and Intermediate Districts

The Section 27k Student Loan Repayment Program strives to increase the retention of teachers, including those in critical shortage areas, aligning with goal 7 of Michigan’s Top 10 Strategic Education Plan. A district or intermediate district that applies for funding under this section must use the funding to implement a student loan repayment program for its employees.

Learn more about the grant program in the Michigan Department of Education’s Student Loan Repayment Program web page and Frequently Asked Questions.

Applications opened February 29, 2024, and are due April 11, 2024.

Accounting issues

Is the grant taxable income to the employee?

The payment is provided as a “reimbursement.” Therefore, it would not be taxable and should not be included in box 1 of the employee’s W-2.  

For educational reimbursements, amounts up to $5,250 are nontaxable. (Note: Must be under an Educational Assistance Program [EAP] – see below.) Any amounts that exceed $5,250 could be taxable unless other exemptions are met.

Education reimbursements fall into two sections of the Internal Revenue Code. The first, and the section we recommend using, is Section 127. Following is a summary of the requirements for the reimbursements to be nontaxable.

Under Section 127, the employer must pay such reimbursements under an Educational Assistance Program (EAP). EAPs may range in formality and length; however, specific criteria must be included in each EAP. The EAP must:

• Be a written document.
• Not provide eligible employees with a choice between educational assistance benefits and any other taxable compensation (whether cash or noncash)
• Provide eligible employees with reasonable notification of the availability of the terms of the program.
• Benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees. Highly compensated employees, for purposes of this section, would include either of the following:
  • Owned at least 5% of the employer’s stock in the preceding or current calendar year (would not apply to schools)
  • Received compensation from the employer in the preceding year in excess of a specified amount denoted annually by the IRS.

The other section that relates to educational reimbursements is Section 132. Under Section 132, education reimbursements can exceed $5,250. Such reimbursements would be tuition payments under the fringe benefit program, which must qualify as a working condition benefit. However, unlike having an EAP under Section 127, a course-by-course analysis must apply to nontaxability under Section 132.

A working condition benefit under Section 132 is an employer-provided benefit that an employee could deduct on their tax return if they had paid the amount themselves. Educational expenses are deductible for an employee if they are directly related to the employee’s current job responsibilities. To be directly related, the expense must meet both of the following requirements:

• Maintains or improves skills required by the employer, including refresher courses and courses dealing with current developments in the employee’s profession.
• Meets the requirements of any applicable law or regulation or any expressed requirements imposed by the employer for bona fide business reasons as a condition to the employee’s continued employment, status or rate of compensation.

Courses that enable an employee to meet the minimum educational requirements for qualification in either the employee’s current field or a new field are not directly related to the employee’s current job responsibilities; therefore, payment or reimbursement for such courses is not nontaxable under Section 132.

How should the district issue the check?

How payments are issued is up to the district, but we recommend using the same method you would use for employee reimbursement. Typically, this would be through payroll. However, we realize situations may arise where accounts payable/vendor checks may be more efficient, such as when an employee has left the district before payment.

How should the payment be recorded?

The MDE’s 1022 Committee will issue guidance for recording Sec. 27k payments. Currently, we recommend the following:

This is a restricted grant; therefore, expenditures should match the revenues recorded. Revenue information from the State will be released in July and August. We recommend accruing amounts anticipated in July and August at year-end (June 30). Reminder: Include the anticipated amount in year-end budget amendments for both revenue and expenditures.

New information will come out on this topic. Yeo & Yeo will provide an update as additional significant information becomes available from MDE.

Contact your Yeo & Yeo auditor or the Education Services Group with questions. We recommend that you contact legal counsel for additional advice.