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In a major victory for student loan borrowers, the Trump administration has agreed to a court-supervised plan that will accelerate debt forgiveness under income-driven repayment programs and protect borrowers from surprise tax bills next year.
The administration and the American Federation of Teachers (AFT) reached an agreement Friday in the case of AFT versus the U.S. Department of Education, ending months of legal tension over the government’s obligation to forgive student debt for borrowers who have made decades of payments under federal law.
The AFT said in a statement that the deal – now awaiting court approval – requires the Department of Education to continue debt forgiveness for eligible borrowers through 2025 and ensure they do not face a surprise tax burden due to bureaucratic delays.
“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, much of that fight for affordability was vindicated,” said AFT President Randi Weingarten. “This year, we attacked the Trump administration when it refused to follow the law and denied borrowers the forgiveness they owed.
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The Trump administration and the American Federation of Teachers have reached an agreement to cancel student loan debt for millions of borrowers. (Kent Nishimura/Los Angeles Times via Getty Images)
“Our agreement means that borrowers in limbo can either get immediate relief or finally see light at the end of the tunnel. And, crucially, they will never be taxed on that relief,” Weingarten continued. “The AFT will hold the federal government to its word, and we will not stop fighting until college is affordable and taking out student loans does not trap millions of Americans in a ruinous and exploitative debt cycle.”
According to the filing, the administration must forgive student debt for all eligible borrowers enrolled in Income-Driven Repayment, Income-Driven 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 repurchase applications, including those from borrowers who are no longer required to demonstrate financial distress. Borrowers whose loans are canceled on or before December 31, 2025 will not receive IRS forms treating the forgiven balances as taxable income.
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The Trump administration agreed to a court-supervised student loan forgiveness plan to prevent borrowers from facing hefty tax penalties before 2025. (Saul Loeb/AFP via Getty Images/Getty Images)
In addition, the administration must submit six monthly progress reports to the court to demonstrate the pace of application processing and loan forgiveness, the AFT said.
The union said the deal also addresses what it called a looming “tax bomb” resulting from a 2026 change in federal tax law that will treat forgiven debt as income. Without this agreement, borrowers whose loans were due to be canceled in 2025 could have simply been punished because of the government’s delays.
“This is a huge win for borrowers,” said Winston Berkman-Breen, legal director of Protect Borrowers. “With today’s filing, borrowers can have some peace of mind knowing that they will not be unfairly hit with a tax bill when their student loans are ultimately canceled, pursuant to federal law.
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A sign marks the entrance to the United States Department of Education headquarters on June 20, 2025 in Washington, D.C. (J. David Aké/Getty Images/Getty Images)
“The U.S. Department of Education has agreed to follow the law and provide congressionally mandated affordable payments and debt relief to hardworking public servants across the country, and will do so under court supervision,” Berkman-Breen added. “We fully intend to hold them to their word.”
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The AFT and several individual borrowers filed the lawsuit in March 2025 after the administration removed IDR enrollment applications from federal websites and quietly ordered loan servicers to stop processing them. The government later resumed accepting and processing applications, but had not publicly committed to canceling debt until now.
The joint status report filed Friday is awaiting court approval.
