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In a significant victory for student loan borrowers, trump administration A court-supervised plan has been agreed to that will speed up loan cancellations under income-driven repayment programs and protect borrowers from unexpected tax bills next year.
The administration and the American Federation of Teachers (AFT) reached a settlement on Friday in the case AFT v. U.S. Department of Education, resolving months of legal tension over the government’s obligation under federal law to cancel student loans for borrowers who have paid for decades.
AFT said in a statement that the deal – now awaiting court approval – requires the Education Department to pursue loan forgiveness for eligible borrowers in 2025 and ensures they will not face surprise tax hits because of bureaucratic delays.
“For nearly a decade, AFT has fought for the rights of student loan borrowers to be free from the shackles of unjust debt – and today, a big part of that affordability fight has been vindicated,” said AFT President Randy Weingarten. “This year, we fought the Trump Administration when it refused to follow the law and denied borrowers the relief they are owed.
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The Trump administration and the American Federation of Teachers reached an agreement to cancel the student debt of millions of borrowers. (Kent Nishimura/Los Angeles Times via Getty Images)
Weingarten added, “Our agreement means borrowers in limbo can either receive immediate relief or finally see light at the end of the tunnel. And, importantly, they will never be taxed on that relief.” “AFT will hold the federal government to its word, and we won’t stop fighting until college becomes affordable and student loans no longer trap millions of Americans in a destructive and exploitative debt cycle.”
According to the filing, the administration will have to cancel it student loan For all eligible borrowers enrolled in Income-Driven Repayment, Income-Contingent Repayment, Pay As You Earn, and Public Service Loan Forgiveness (PSLF) programs. Borrowers who make payments after they are eligible for cancellation will be reimbursed.
The Department of Education must also process IDR and PSLF “buyback” applications, including applications from borrowers who are no longer required to prove financial hardship. Borrowers whose loan is canceled on or before December 31, 2025 will not receive IRS forms treating the forgiven balance as taxable income.
The Trump administration agreed to a court-supervised student loan forgiveness plan through 2025 to prevent borrowers from facing huge tax penalties. (Saul Loeb/AFP via Getty Images/Getty Images)
Additionally, the administration will have to file six monthly progress reports with the court to show the pace of application processing and loan discharge, the AFT said.
The union said the deal also tackles a looming “tax bomb” arising from the 2026 transition. federal tax law He will treat the canceled loan as income. Without this agreement, borrowers whose loans were supposed to expire in 2025 could have been penalized simply because of the government recession.
“This is a tremendous victory for borrowers,” said Winston Berkman-Breen, legal director of Protect Borrowers. “With today’s filing, borrowers can find some comfort knowing that they will not be adversely impacted by a tax bill once their student loans are ultimately canceled, as required by federal law.
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A sign at the entrance to the U.S. Department of Education headquarters building in Washington, DC, on June 20, 2025. (J. David Ake/Getty Images/Getty Images)
“America education department “We have agreed to provide congressionally mandated affordability payments and debt relief to law-abiding and hard-working public service workers across the country, and will do so under the court’s supervision,” Berkman-Breen said. “We fully intend to hold them to their word.”
Fox Business has contacted the White House for comment.
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AFT and several individual borrowers filed suit in March 2025 after the administration removed IDR enrollment applications from federal websites and quietly directed loan servicers to stop processing them. The government later resumed accepting and handling applications, but had not yet publicly committed to canceling the debt.
The joint status report filed on Friday is awaiting court approval.
