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In a significant win for student loan borrowers, the Trump administration has agreed to a court-supervised plan that will speed up debt cancellation under income-driven repayment programs and protect borrowers from unexpected tax bills next year.
The administration and the American Federation of Teachers (AFT) reached the agreement Friday in the AFT v. U.S. Department of Education case, resolving months of legal tension over the government’s obligation to cancel 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 Education Department to follow through on debt forgiveness for eligible borrowers in 2025 and ensures they won’t face a surprise tax hit because of 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, a huge part of that affordability fight was vindicated,” AFT President Randi Weingarten said. “This year, we took on the Trump administration when it refused to follow the law and denied borrowers the relief they were owed.
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The Trump administration and the American Federation of Teachers reached an agreement to cancel student loans for millions of borrowers. (Kent Nishimura / Los Angeles Times via Getty Images)
“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. And, crucially, they won’t ever get taxed on that relief,” Weingarten continued. “The AFT will hold the federal government to its word, and we won’t stop fighting until college is affordable and taking out a student loan doesn’t trap millions of Americans in a ruinous and exploitative debt cycle.”
According to the filing, the administration must cancel student debt for all eligible borrowers enrolled in income-driven repayment, income-contingent repayment, Pay As You Earn, and Public Service Loan Forgiveness (PSLF) programs. Borrowers who make payments after becoming eligible for cancellation will be reimbursed.
The Education Department must also process IDR and PSLF “buyback” applications, including those from borrowers no longer required to prove financial hardship. Borrowers whose loans are canceled on or before Dec. 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 steep tax penalties for 2025. (Saul Loeb/AFP via Getty Images / Getty Images)
Additionally, the administration must file six monthly progress reports with the court to show the pace of application processing and loan discharges, the AFT said.
The union said the deal also tackles what it called a looming “tax bomb” stemming from a 2026 change in federal tax law that will treat canceled debt as income. Without this agreement, borrowers whose loans should be wiped out in 2025 could have been penalized simply because of government slowdowns.
“This is a tremendous win for borrowers,” Winston Berkman-Breen, the legal director for Protect Borrowers, said. “With today’s filing, borrowers can rest a little easier knowing that they won’t be unjustly hit with a tax bill once their student loans are finally canceled, pursuant to federal law.
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A sign marks the entrance to the U.S. Department of Education headquarters building on June 20, 2025, in Washington, D.C. (J. David Ake/Getty Images / Getty Images)
“The U.S. Department of Education has agreed to follow the law and deliver congressionally mandated affordable payments and debt relief to hard-working public service workers across the country, and will do so under court supervision,” Berkman-Breen added. “We fully intend to hold them to their word.”
FOX Business has reached out to the White House for comment.
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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 instructed loan servicers to stop processing them. The government later resumed accepting and handling applications but had not publicly committed to canceling debt until now.
The joint status report filed Friday is awaiting court approval.
