Student Loan Forgiveness Is Back — Here’s What it Means for Borrowers

The Trump administration has agreed to resume processing student loan forgiveness across multiple programs, in a major victory for millions of borrowers.The agreement, first announced last Friday, is intended to resolve a lawsuit filed by the American Federation of Teachers (AFT), one of the nation’s largest teachers’ unions, earlier this year.The AFT had originally sued the Department of Education last spring over the stalled processing of applications for income-driven repayment (IDR) and PSLF Buyback, a program that allows borrowers pursuing Public Service Loan Forgiveness to make a payment to convert certain ineligible deferment and forbearance periods into qualifying time toward student loan forgiveness.The AFT subsequently expanded its lawsuit in September to challenge the administration’s pause on IBR loan forgiveness and its refusal to grant loan forgiveness under the ICR and PAYE plans.

“For nearly a decade, the AFT has fought for the rights of student loan borrowers to be freed from the shackles of unjust debt—and today, a huge part of that affordability fight was vindicated,” said AFT President Randi Weingarten in a statement.“This year, we took on the Trump administration when it refused to follow the law and denied borrowers the relief they were owed.Our agreement means that those borrowers stuck in limbo can either get immediate relief or finally see a light at the end of the tunnel.” “This settlement will resolve the teachers’ union’s lawsuit and will provide life-changing relief for millions of borrowers who have carried the burden of unaffordable student debt for far too long,” said Mitria Spotser, vice president and federal policy director at the Center for Responsible Lending (CRL), in a statement.“We urge the administration to build on this progress and deliver comprehensive relief for borrowers still struggling under the weight of student debt.” The joint agreement between the AFT and the Department of Education still must be approved by the court before it is effective.

But assuming it ultimately gets approved, here’s what it means for student loan borrowers.Borrowers pursuing IDR student loan forgiveness Under the terms of the agreement, the Department of Education agreed to restart processing student loan forgiveness for qualifying borrowers under the Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay As You Earn (PAYE) plans.These programs authorize loan forgiveness after a borrower has been in repayment for 20 or 25 years, depending on the plan.The department had previously refused to process loan forgiveness for ICR and PAYE borrowers, arguing that a federal court had blocked loan forgiveness under these programs in a recent court order related to a dispute over the SAVE plan, a separate IDR program that was launched under the Biden administration but was challenged in court by a Republican-led states.

The AFT disputed this characterization of the status of ICR and PAYE loan forgiveness.Meanwhile, the department acknowledged that loan forgiveness under the IBR plan — which was separately authorized by Congress — was legal; but the department had nevertheless suspended IBR loan forgiveness to make system updates.Under the terms of the agreement, the department “will continue processing loan cancellations for borrowers who are eligible for cancellation under the Income-Based Repayment (IBR) plan.” In addition, the department “will continue processing loan cancellations for borrowers who are eligible for cancellation under the Original Income Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans as long as these plans are in effect.” ICR and PAYE will sunset by July 1, 2028 under the provisions of the “One Big, Beautiful Bill Act” that President Trump signed into law in July.Student loan forgiveness will continue to be blocked under the SAVE plan, as an injunction ordered by a federal appeals court remains in effect.

Borrowers who qualify for loan forgiveness under SAVE would need to apply to switch to IBR, ICR or PAYE to pursue or receive IDR loan forgiveness.Borrowers pursuing student loan forgiveness through PSLF Buyback Under the agreement, the Department of Education also agreed to continue processing requests for PSLF Buyback.“Defendants will continue processing applications for Public Service Loan Forgiveness (PSLF) Buybacks,” says the agreement.However, the agreement provides no specific assurances about the pace of that processing.

The PSLF Buyback program has been plagued by substantial backlogs and delays, with many borrowers still waiting for a response after submitting an application months ago.Data provided by the department indicates that despite a steady rate of processing of a few thousand PSLF Buyback applications each month on average, the backlog has grown from around 49,000 earlier in the spring to more than 74,000 as of late this summer.That backlog will probably continue to grow, as PSLF Buyback processing has most likely stalled out in light of the ongoing government shutdown.Taxation on student loan forgiveness The agreement between the Department of Education and the AFT also provides assurances for student loan borrowers on taxation, a major concern raised by the AFT when it filed an amended lawsuit in September.

Normally, the cancellation of any can debt trigger the issuance of an IRS Form 1099-C, which requires the borrower to report the amount of cancelled debt as income on their tax return, triggering potential tax liability.Some forms of student loan forgiveness have traditionally not been treated as taxable, such as PSLF.But other types of loan forgiveness, including loan forgiveness on the 20- and 25-year terms under IDR plans, have.The American Rescue Plan Act signed into law by President Biden in 2021 exempted all forms of student loan forgiveness from taxation at the federal level, but only until 2025.

Republican lawmakers did not extend this relief in the “One Big, Beautiful Bill Act,” so IDR loan forgiveness returns to being taxable again in 2026.The AFT argued in its legal challenge that the department’s processing delays and refusals to grant student loan forgiveness under several IDR plans meant that many borrowers who would qualify for relief during 2025 (and avoid tax consequences) could see their discharges pushed into 2026.This could trigger the issuance of a Form 1099-C, raising the possibility of significant tax liability for these borrowers.Under the terms of the agreement announced last week, the department indicated it would treat a borrower’s student loan forgiveness eligibility date as the effective date of discharge for tax purposes, regardless of when the actual discharge actually happens.

This is intended to protect borrowers who qualify for a discharge in 2025 from being hit with a Form 1099-C, even if they don’t actually receive loan forgiveness until sometime in 2026.PSLF remains tax-free federally next year.“Defendants agree that for their internal purposes, the date a borrower becomes eligible to have their loans cancelled under the IBR, Original ICR, or PAYE plans constitutes the effective date of their loan discharge,” says the agreement.“Defendants agree to not file an Internal Revenue Service (IRS) Form 1099- C for a borrower who becomes eligible for discharge in 2025 if the conditions in IRS Notice 2022-1 are met.” Importantly, under the agreement, borrowers in the SAVE plan who qualify for loan forgiveness must apply to switch to IBR, ICR or PAYE by December 31, 2025, in order to receive this tax benefit.

The agreement also includes a caveat that the ultimate decision about how to treat student loan forgiveness for tax purposes falls to the IRS.“Plaintiffs acknowledge that the IRS and the U.S.Department of the Treasury, and not Defendants, have the final say on whether Defendants’ student loan cancellations qualify as taxable income under Section 9675(a) of the American Rescue Plan Act of 2021, previously codified at 26 U.S.C.§ 108(f)(5) (2023),” says the agreement.

Borrowers who qualify for student loan forgiveness in either 2025 or 2026 should talk to a tax professional about the potential tax implications, including at the state level.This includes borrowers enrolled in any IDR plan, as well as those pursuing PSLF.Not all states will mirror the federal tax treatment of loan forgiveness.