- The Trump administration reached a settlement on October 20, 2025, to cancel student loan debt for eligible borrowers without tax penalties.
- The agreement applies to borrowers in income-driven repayment plans, including income-contingent repayment, Pay As You Earn, and Public Service Loan Forgiveness programs.
- The IRS will not treat canceled student loan balances as taxable income through December 31, 2025, protecting borrowers from a 2026 tax law change.
- The Education Department must process forgiveness applications and reimburse borrowers who paid after becoming eligible, under court supervision with progress reports.
- The settlement follows a lawsuit by the AFT and requires student loan forgiveness to proceed without delays or tax consequences for millions of borrowers.
The Trump administration agreed on October 20, 2025, to cancel student loan debt for eligible borrowers without imposing tax penalties. This settlement applies to millions of borrowers enrolled in income-driven repayment programs. The administration will carry out debt cancellation under court supervision.
The case, AFT v. U.S. Department of Education, resulted in an agreement that ensures borrowers in income-driven repayment, income-contingent repayment, Pay As You Earn, and Public Service Loan Forgiveness programs will have their student loans forgiven. The IRS will not send forms treating forgiven loan balances as taxable income for loans canceled by December 31, 2025. This protects borrowers from a 2026 tax law change that would have treated canceled debt as income.
The Education Department is now required to process forgiveness applications and reimburse borrowers who continued payments after becoming eligible for cancellation. The agreement mandates six monthly progress reports to the court to verify compliance with the settlement. AFT President Randi Weingarten stated, “Our agreement means that those borrowers stuck in limbo can either get immediate relief or finally see a light at the end of the tunnel… The AFT will hold the federal government to its word.”
Legal director for Protect Borrowers, Winston Berkman-Breen, remarked, “This is a tremendous win for borrowers… they won’t be unjustly hit with a tax bill once their student loans are finally canceled.” He added, “The US Department of Education has agreed to follow the law and deliver Congressionally mandated affordable payments and debt relief… under court supervision.”
The settlement followed a lawsuit filed in March 2025 after the administration had removed enrollment applications from federal websites and directed loan servicers to stop processing them. The court is currently reviewing the joint status report related to this case. Meanwhile, President Trump’s “Big, Beautiful Bill” will phase out the income-contingent and Pay As You Earn repayment plans by July 1, 2028. Borrowers who qualify are encouraged to complete their forgiveness applications before then. The government has resumed accepting applications and publicly committed to canceling eligible student debt following this agreement.
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