Student Loan Borrowers Gain Tax Relief & Increased Oversight in Forgiveness Processing
The Department of Education has reached an agreement addressing key concerns in a lawsuit brought by the American Federation of Teachers (AFT), offering meaningful relief to borrowers pursuing student loan forgiveness. A central component of the agreement shields qualifying borrowers from unexpected tax liabilities on discharged debt, even with processing delays.
Specifically, the department will treat the date a borrower becomes eligible for loan cancellation under Income-Based Repayment (IBR), Original Income Contingent Repayment (ICR), or Pay As You Earn (PAYE) plans as the official discharge date for internal purposes. This means borrowers who reach eligibility in 2025 will not receive a 1099-C form – the document typically triggering tax obligations on cancelled debt considered as income.
The tax protection extends to borrowers currently enrolled in the SAVE plan who strategically switch to IBR, ICR, or PAYE before January 1, 2026. Even if the actual loan discharge occurs after their submission to switch plans is approved, the eligibility date under the original SAVE plan will be considered the discharge date for tax purposes. Though, SAVE plan borrowers must submit their application to transfer to one of the aforementioned plans by December 31, 2025, to qualify for this protection.
Beyond tax relief, the department has committed to reimbursing borrowers who make payments after reaching the point of qualifying for loan discharge. Any overpayments will be refunded.
while this agreement resolves the immediate issues raised in the AFT’s lawsuit, the legal challenge remains open. To ensure accountability, the Department of Education will file monthly public status reports detailing its progress in processing loan forgiveness applications under IBR, ICR, PAYE, and Public Service Loan Forgiveness (PSLF). The first report is due 30 days after the current federal funding lapse ends, with subsequent reports following every 30 days for the next six months.
The AFT has pledged to closely monitor the department’s compliance with the agreement, stating their “full intention to hold them to their word.” This increased oversight aims to ensure borrowers receive the forgiveness they are entitled to under these programs. The department maintains that this agreement does not constitute an admission of guilt or concession of any legal arguments.