Key points
- The U.S. Department of Education settled the AFT’s lawsuit, agreeing to resume temporarily suspended Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF) operations.
- Borrowers will not be denied income-based repayment (IBR) for lack of partial financial hardship, consistent with the Big Beautiful Bill of 2025.
- The settlement requires six months of public status reports on the IDR and PSLF backlog, with continued tax relief for borrowers who qualify before 2026.
In a major win for borrowers, the US Department of Justice agreed settles down (PDF file) A lawsuit filed by the American Federation of Teachers (AFT) against the U.S. Department of Education on Friday, October 17, 2025.
The AFT filed the lawsuit on March 18, 2025, alleging that the U.S. Department of Education unlawfully blocked or delayed forgiveness of loans owed under the Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF) plans.
By settling the lawsuit, the federal government avoids the cost of continuing to pursue lawsuits that it would ultimately lose and which may have been more costly to the federal government than such a settlement.
The settlement suspends requests for preliminary injunction and class certification, without prejudice.
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No more denial of partial financial hardship for IBR borrowers
The federal government agrees not to deny income-based repayment (IBR) to borrowers who are in partial financial distress. This is consistent with OBBBA legislation enacted on July 4, 2025.
Borrowers who applied for IBR on or after July 4, 2025, but were denied for partial financial distress must reapply.
However, technical limitations remain that prevent the complete removal of the partial financial distress requirement, and are expected to be resolved in “winter 2025.”
IBR will continue to be forgiven
US Department of Education IBR remission was previously paused on July 9, 2025, although some borrowers reported it was paused in April 2025 or even earlier.
The Federal Government agrees that the IBR exemption, which resumed in early October 2025, will now continue without interruption.
Reclaim time-based student loan forgiveness
Along with IBR loan forgiveness, the Department of Education has reversed its previous position on ICR and PAYE forgiveness.
Borrowers on original ICR and PAYE repayment plans will continue to qualify for time-based student loan forgiveness as long as those plans are in effect. ICR and PAYE will be phased out by July 1, 2028.
Remember, income-driven repayment plans, such as IBR, ICR, and PAYE, all include loan forgiveness after you make a set number of payments — either 20 or 25 years. After that time, any remaining balance is forgiven.
As of June 30, 2025, there were:
- 1.33 million borrowers in ICR
- 1.33 million borrowers in PAYE
Therefore, up to 2.5 million borrowers could be eligible for time-based relief.
The actual number of eligible borrowers will be lower, likely less than 600,000 borrowers, since most borrowers have not been in these repayment plans long enough. Specifically, all PAYE borrowers will be ineligible since PAYE began in 2011, and the earliest relief dates will be 2031.
To qualify for time-based relief, eligible borrowers will need to switch to an IBR repayment plan, along with the 7.73 million borrowers in the savings deferral period, until they can make their payments.
Borrowers eligible for loan forgiveness under IBR, original ICR, and PAYE will continue to be compensated for payments made after the payment qualifies the loans for discharge.
PSLF buyback processing
The parties agreed to continue processing PSLF buybacks as well. While this was happening, the pace was slow and the backlog was growing.
Borrowers can count their months in savings forbearance toward PSLF only if they are close to the qualifying payment requirement of 120 and successfully submit the PSLF Repurchase Option Form.
The U.S. Department of Education has agreed to continue processing PSLF repurchase option applications. However, the timeline is worrying as the backlog is well over a year old as of today.
Monthly status reports to track backlog
The US Department of Education has been submitting monthly status reports on processing the court’s backlog of cases since April. the Latest report(PDF) Shows an IDR application processing backlog of 1,076,266 applications as of August 2025, and a PSLF repurchase option processing backlog of 74,510 applications.
The federal government will provide six more monthly situation reports, starting 30 days after the government shutdown ends. Condition reports will include the following information:
- Number of income-based payment plans Requests received During the previous month
- Number of income-based payment plans Orders that were still pending At the end of the previous month
- Number of income-based payment plans Processed applications (including the approved or rejected number if possible) during the previous month
- number Borrowers whose loans have been repaid Under an income-based repayment plan (including the number discharged under IBR, original ICR and PAYE, if applicable) during the previous month
- Number of PSLF repurchase option Requests received During the previous month
- Number of PSLF repurchase option Requests that were pending At the end of the previous month
- Number of PSLF repurchase option Processed applications (Classified according to the number approved and the number rejected) during the previous month
- Number of borrowers who The loans were repaid under the PSLF During the previous month
Taxability of loan forgiveness
Taxes on student loan forgiveness are complicated.
The American Rescue Plan Act (ARPA) provides that student loans will be tax-free from 2021 through 2025. This income exclusion will expire on December 31, 2025.
However, the federal government has agreed that borrowers who satisfied the time-based forgiveness requirements under the original IBR, ICR, and PAYE before December 31, 2025 will receive tax-free forgiveness even if the actual loan discharge process is delayed until 2026 or later.
This also includes SAVE borrowers who apply to convert their loans to IBR, original ICR, or PAYE on or before December 31, 2025 and meet forgiveness eligibility in 2025.
These borrowers will not receive an IRS Form 1099-C for forgiveness.
However, starting January 1, 2026, time-based loan forgiveness will become taxable again. Borrowers may face a “tax bomb” that may require planning.
Key takeaways
The settlement between the Department of Education and the American Federation of Teachers represents a hoped-for improvement to the student loan system. It restores paused loan forgiveness programs, fixes errors that prevented eligible borrowers, and introduces new transparency about how applications are processed.
However, the challenges are not over yet. More than a million income-based repayment requests remain in limbo, and borrowers are racing to qualify for tax relief before the Dec. 31, 2025, deadline.
For millions of teachers, nurses, and public service workers, this agreement provides long-awaited progress, but it also underscores how fragile the system is without sustained oversight and clear federal action.
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Editor: Robert Farrington
The post US Department of Education Settles Student Loan Forgiveness Lawsuit appeared first on The College Investor.
