U.S. Department of Education Settles Student Loan Forgiveness Lawsuit

In a big win for borrowers, the U.S. Department of Justice agreed to settle (PDF File) the American Federation of Teachers (AFT) lawsuit against the U.S. Department of Education on Friday, October 17, 2025.

The AFT filed the lawsuit on March 18, 2025, claiming that the U.S. Department of Education had unlawfully blocked or delayed loan forgiveness owed under Income-Driven Repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).

By settling the lawsuit, the federal government avoids the cost of continuing to pursue litigation that it would ultimately lose and which might have been more expensive for the federal government than this settlement. 

The settlement suspends the motions for a preliminary injunction and class certification, without prejudice.

No More Partial Financial Hardship Denial For IBR Borrowers

The federal government agrees that Income-Based Repayment (IBR) will not be denied to borrowers who lack a partial financial hardship. This is consistent with the OBBBA legislation that was enacted on July 4, 2025. 

Borrowers who applied for IBR on or after July 4, 2025, but who were denied because of a lack of a partial financial hardship should reapply.

However, there are still technical limitations preventing the full removal of the Partial Financial Hardship requirement, and that’s expected to be resolved in “Winter 2025”.

IBR Forgiveness Will Continue

The U.S. Department of Education previously paused IBR forgiveness on July 9, 2025, though some borrowers reported that it had been paused in April 2025 or even earlier.

The federal government agrees that IBR forgiveness, which restarted in early October 2025, will now continue without interruption.

Restoration Of Time-Based Student Loan Forgiveness

Along with IBR loan forgiveness, the Department of Education walked back their previous stance on ICR and PAYE forgiveness.

Borrowers in the original ICR and PAYE repayment plans will continue to qualify for time-based student loan forgiveness for as long as these plans are in effect. ICR and PAYE will phase out by July 1, 2028.

Remember, income-driven repayment plans like IBR, ICR, and PAYE all include loan forgiveness after making 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

So, up to about 2.5 million borrowers could qualify for time-based forgiveness.

The actual number of borrowers who will qualify will be lower, likely less than 600,000 borrowers, since most borrowers have not been in these repayment plans long enough. Specifically, borrowers in PAYE would all be ineligible since PAYE started in 2011 and the earliest forgiveness dates would be 2031.

To qualify for time-based forgiveness, eligible borrowers will need to switch into the IBR repayment plan, along with the 7.73 million borrowers in a SAVE forbearance, in order to have their payments could. 

Borrowers who qualify for loan forgiveness under IBR, Original ICR and PAYE will continue to be reimbursed for payments made after the payment that qualified the loans for discharge.

PSLF Buyback Processing

The parties agreed to continue PSLF buyback processing as well. While this has been happening, the pace has been slow and the backlog has been growing.

Borrowers can count the months they spent in a SAVE forbearance toward PSLF only if they are close to the 120 qualifying payment requirement and they successfully file a PSLF Buyback Option form. 

The U.S. Department of Education has agreed to continue processing the PSLF Buyback Option applications. The timeline, though, is concerning as the backlog is taking upwards of a year as of today.

Monthly Status Reports To Track The Backlogs

The U.S. Department of Education has been filing monthly status reports about the processing backlogs with the court since April. The most recent report (PDF File) shows an IDR Application Processing Backlog of 1,076,266 applications as of August 2025, and a PSLF Buyback Option Processing Backlog of 74,510 applications.

The federal government will file six more monthly status reports, starting 30 days after the government shutdown ends. The status reports will include the following information:

• The number of income-driven repayment plan applications received during the previous month
• The number of income-driven repayment plan applications that were still pending at the end of the previous month
• The number of income-driven repayment plan applications that were processed (including the number approved or denied, if possible) during the previous month
• The number of borrowers whose loans were discharged under an income-driven repayment plan (including the number discharged under IBR, original ICR and PAYE, if possible) during the previous month
• The number of PSLF Buyback Option applications that were received during the previous month
• The number of PSLF Buyback Option applications that were pending at the end of the previous month
• The number of PSLF Buyback Option applications that were processed (disaggregated by the number approved and the number denied) during the previous month
• The number of borrowers whose loans were discharged under PSLF during the previous month

Taxability Of Loan Forgiveness

Taxes on student loan forgiveness are complicated.

The American Rescue Plan Act (ARPA) provided for tax-free forgiveness of student loans from 2021 through 2025. This exclusion from income will expire on December 31, 2025.

The federal government, however, has agreed that borrowers who satisfied the requirements for time-based forgiveness under IBR, original ICR and PAYE prior to 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 transfer their loans to IBR, original ICR or PAYE on or before December 31, 2025 and meet the eligibility for forgiveness in 2025. 

These borrowers will not receive an IRS Form 1099-C for the forgiveness.

However, starting on January 1, 2026, time-based loan forgiveness will become taxable once again. Borrowers could face a “tax bomb” that may require planning.

Key Takeaways

The settlement between the Department of Education and the American Federation of Teachers marks hopeful improvement to the student loan system. It restores paused loan forgiveness programs, fixes errors that blocked eligible borrowers, and introduces new transparency into how applications are processed.

Still, the challenges are far from over. More than a million income-driven repayment applications remain in limbo, and borrowers are racing to qualify for tax-free forgiveness before the December 31, 2025 deadline.

For millions of teachers, nurses, and public service workers, this agreement offers long-awaited progress, but it also underscores how fragile the system remains without sustained oversight and clear federal action.

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