Key points
- The American Federation of Teachers (AFT) and the U.S. Department of Education have reached an agreement to halt portions of ongoing litigation over income-based repayment (IDR) programs.
- The Department of Education will continue to process loan discharges and stop denying borrowers who are in “partial financial distress.”
- Six other status reports will provide transparency on loan forgiveness and application processing.
The American Federation of Teachers and the U.S. Department of Education have temporarily resolved key disputes in a major federal lawsuit challenging the treatment of income-driven reimbursement and relief programs.
In a The joint status report was filed on Friday(PDF) In the U.S. District Court for the District of Columbia, both sides asked Judge Reggie B. Walton may deny, for the time being, the union’s requests for a preliminary injunction and class certification. These proposals sought immediate relief for borrowers who said they were wrongly denied or delayed in receiving debt cancellation.
The agreement allows the Department of Education to continue processing student loan forgiveness under Income Based Repayment (IBR), Income Conditional Repayment (ICR)and Pay as you earn (PAYE) programs while the lawsuit remains pending.
The AFT filed suit earlier this year, alleging that the department failed to provide legally required repayment plans and loan forgiveness. The lawsuit has a potential impact on millions of borrowers who are navigating repayment rules and staggered deadlines.
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@thecollegeinvestor New Education Department Litigation Updates: IBR, ICR, and PAYE loan forgiveness processing continues, effective date of loan forgiveness is clarified, and status reports will continue. #Student loans #studentloandebt #Personal finance ♬ Original Investor College audio
Main terms of the agreement
The new joint filing sets out a detailed interim framework intended to protect borrowers as litigation continues:
- No more denial of “partial financial hardship.” The Department agreed not to reject any borrower who applies for an IBR plan solely because they lack “partial financial hardship,” a standard rooted in a decades-old definition from the Higher Education Act. Borrowers who have been rejected on this basis since July 4, 2025, will be invited to reapply once management systems are updated.
- Loans continue to be discharged. Borrowers who already qualify for cancellation under IBR, ICR or PAYE will continue to see their loans repaid, and the department confirmed that those whose payments exceed the final qualifying amount will receive compensation.
- Tax treatment explained. The Department of Education has confirmed that it will not issue IRS Form 1099-C to borrowers whose loans were repaid in 2025, provided that the conditions in IRS Notice 2022-1 apply. However, the agency noted that final tax determinations remain under the authority of the IRS and the Treasury Department.
- Public transparency. Over the next several months, the Department must submit six public status reports detailing application volumes, pending cases, decisions, and discharges across the Income-Driven Repayment Program and the Public Service Loan (PSLF) repurchase program. The first report will be due within 30 days after the end of the current government shutdown.
The first report should also explain how the department determines which borrowers are eligible for release and disclose how many IBR applications were rejected after July 4 for financial reasons.
What this means for student loan borrowers
For the millions of Americans still paying off their student loans, the agreement signals relief and continued uncertainty. By halting hardship-based denials, the Department of Education effectively ensures that borrowers leaving the Savings on Value Education (SAVE) plan or other repayment programs will not lose eligibility due to outdated definitions.
Borrowers who become eligible for cancellation in 2025 under income-based plans will be treated as having their loans paid off as of their eligibility date, not the later date when the paperwork is processed. This clarification can prevent tax complications.
The inclusion of PSLF “buyback” data also reflects ongoing efforts to monitor the program, which allows borrowers to receive credit for earlier periods of qualifying payments, but faces significant delays.
What comes next?
The court must still approve the agreement. If accepted, the case will remain open but paused while management issues reports and implements system updates.
For now, the most immediate benefit will be clarity for borrowers who applied for IBR after 4 July 2025, but were rejected for reasons of financial hardship. These individuals will have the opportunity to reapply once the processing systems are repaired – Expected in winter 2025.
Meanwhile, borrowers will at least get more transparency into what’s happening with the student loan system amid the changes.
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Editor: Colin Greaves
The post Department of Education Agrees to Continue Loan Forgiveness appeared first on The College Investor.
