The Department of Education agreed to procedures for student debt relief so borrowers who are eligible to have their loans canceled this year don't get hit with a huge tax bill due to the Trump administration's processing delays.
The parties in a lawsuit filed by the American Federation of Teachers against the U.S. Department of Education filed a
"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. "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. And, crucially, they won't ever get taxed on that relief. The AFT will hold the federal government to its word, and we won't stop fighting until college is affordable and taking out a student loan doesn't trap millions of Americans in a ruinous and exploitative debt cycle."
When the lawsuit was originally filed in March, the Trump administration had removed the application to enroll in income-driven repayment plans from government websites and had issued a secret order to government student loan contractors to halt all IDR enrollment and processing.
After the lawsuit was filed, the Department of Education soon resumed accepting applications and, months later, began processing the applications again. However, it said it would not cancel student loan debt for borrowers under certain (and at times, any) IDR plan, despite a legal obligation to do so under federal law. The new filing in the case indicates the Trump administration has committed publicly, for the first time, that it does intend to follow the law and cancel student debt.
The teachers union and the individual borrower plaintiffs urged the court to act in this case because of a little-known change in tax law that will subject borrowers whose debts are cancelled in 2026 and beyond to a so-called "tax bomb," treating tens or hundreds of thousands of dollars in canceled student debt as regular income for tax purposes. Last Friday's filing recognizes that borrowers who are eligible to have debts canceled in 2025 should not be forced to pay a tax penalty as a result of government processing delays, ongoing litigation, and other dysfunction across the student loan system.
"This is a tremendous win for borrowers," said Winston Berkman-Breen, legal director of the advocacy group Protect Borrowers in a statement Friday. "With today's filing, borrowers can rest a little easier knowing that they won't be unjustly hit with a tax bill once their student loans are finally cancelled, pursuant to federal law. The U.S. Department of Education has agreed to follow the law and deliver congressionally mandated affordable payments and debt relief to hard-working public service workers across the country, and will do so under court supervision. We fully intend to hold them to their word."
In the joint status report, the Trump administration agreed to:
- Cancel student debt for all eligible borrowers enrolled in income-based repayment, income-contingent repayment, pay-as-you-earn payment plans and public service loan forgiveness programs;
- Provide refunds to any borrowers who make additional payments beyond the date of eligibility for cancellation through an IDR;
- Process IDR and PSLF Buyback applications, including applications for the IBR plan from borrowers without a partial financial hardship, as that requirement was eliminated by the One Big Beautiful Bill Act;
- Recognize the date a borrower becomes eligible to have their debt canceled under an IDR plan as the effective date of their discharge and not to issue IRS forms suggesting that canceled debt is taxable for borrowers whose effective date is on or before Dec. 31, 2025; and,
- File six monthly status reports with the court on the status of its IDR and PSLF application and loan cancellation processing.
The relief is expected to extend to all borrowers under the agreement.
