Following Lawsuit by the AFT, Trump Administration Agrees to Deliver Student Debt Relief and Protect Borrowers from Tax Liability Due to Red Tape and Delays

WASHINGTON—Today, the parties in AFT v. U.S. Department of Education filed a joint status report in federal court agreeing to a series of actions that will protect borrowers enrolled in income-driven repayment (IDR) plans and deliver student debt relief to borrowers making payments under those plans for decades, as required by federal law. Critically, the Trump administration agreed to procedures so that borrowers who are eligible to have their loans canceled in 2025 don’t get stuck with a large tax bill due to the administration’s processing delays. The parties have asked the court to enter their agreement as a court order.

“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. “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. 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.”

“This is a tremendous win for borrowers. 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 canceled, pursuant to federal law,” said Winston Berkman-Breen, Protect Borrowers legal director. “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.”

The Joint Status Report filed today in AFT v. U.S. Department of Education is available here.

This filing is a major milestone in this lawsuit, filed by the AFT and individual borrowers earlier this year. At the time the lawsuit was originally filed in March 2025, the Trump administration had removed the application to enroll in IDR from government websites and had issued a secret order to government student loan contractors to halt all IDR enrollment and processing. After this lawsuit was filed, the government quickly resumed accepting applications and, months later, began processing those applications again. However, until today, the government had represented that 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. Today’s filing shows that the Trump administration has committed publicly, for the first time, that it does intend to follow the law and cancel student debt.

The AFT 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 canceled in 2026 and beyond to a “tax bomb”—treating tens or hundreds of thousands of dollars in canceled student debt as borrowers’ regular income for tax purposes. Today’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.

Specifically, in the joint status report filed today, which is still awaiting court approval, 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 the Public Service Loan Forgiveness program;
• Provide refunds to any borrowers who make additional payments beyond date of eligibility for cancellation through 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.

This relief will extend to all borrowers.

Further Reading

Read the press release announcing the lawsuit: AFT Sues U.S. Department of Education, Demands Justice for Student Loan Borrowers Blocked from Affordable Loan Payments (March 19, 2025)

Read the press release announcing IDR application restoration: AFT v. ED Update: Under Pressure, ED Will Restore IDR Application Tomorrow but Will Not Immediately Resume IDR Paperwork Processing (March 25, 2025)

Read the press release announcing the amended complaint and motion for class action relief: AFT Demands Student Debt Cancellation by End of Year, Adds Class Action Plaintiffs

Read an article by Adam Minsky in Forbes on the lawsuit: Group Files Class Action Lawsuit Over Student Loan Forgiveness Denials and Backlogs (Sept. 10, 2025)

Read the lawsuit’s federal court docket: AFT et al., v. U.S. Department of Education (1:25-cv-00802)

About Protect Borrowers

Protect Borrowers (formerly Student Borrower Protection Center) is a nonprofit organization led by a team of experts, lawyers and advocates fighting to build an economy where debt doesn’t limit opportunity. We investigate financial abuses, take predatory companies to court and push for policies to protect working people from debt traps. We aim to deliver immediate relief to families while building power, driving systemic change and fighting for racial and economic justice.

Learn more at protectborrowers.orgor follow us on social @BorrowerJustice.