Millions of student loan borrowers stuck in limbo are finally getting some relief after the Trump administration agreed to cancel debt under a court-supervised plan.
The decision follows a lawsuit filed by the American Federation of Teachers (AFT) and marks a major shift in federal student loan policy.
The court agreement, still awaiting final approval, requires the Department of Education to cancel student debt for eligible borrowers by the end of 2025 and prevents the IRS from taxing that forgiven debt.
Borrowers enrolled in income-driven repayment (IDR) plans, including Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and the Public Service Loan Forgiveness (PSLF) program, are covered by the deal.
Borrowers Stuck for Decades
For years, millions of borrowers have made payments under these federal repayment programs, expecting their debt to be canceled after 20 to 25 years.
But due to bureaucratic delays and sudden policy reversals, many never saw their balances go down.
Earlier this year, the Trump administration quietly pulled IDR applications from federal websites and ordered student loan servicers to stop processing them.
That prompted the AFT to sue in March, arguing the government was failing to follow its legal obligation.
The lawsuit resulted in a new legal agreement filed Oct. 17, which confirms the administration will now cancel the debt for eligible borrowers, refund overpayments, and provide updates on the progress.
What the Court Deal Includes
According to the joint status report, the Department of Education must:
- Cancel student debt for all eligible borrowers enrolled in qualifying repayment plans;
- Refund any payments made after borrowers became eligible for forgiveness;
- Process IDR and PSLF buyback applications, even for those who no longer need to prove financial hardship;
- Treat the date a borrower becomes eligible for forgiveness as the official cancellation date, ensuring they don’t get taxed on the relief if it’s before Dec. 31, 2025;
- Submit six-monthly progress reports to the court.
The deal also prevents a so-called “tax bomb” from hitting borrowers. Under a 2026 federal tax law change, forgiven debt would be treated as income.
Without this court agreement, borrowers whose debt was delayed until 2026 could have faced unexpected tax bills.
Relief for Millions
AFT President Randi Weingarten said, “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.”
She added, “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.”
Winston Berkman-Breen, legal director of the nonprofit Protect Borrowers, called the outcome a “tremendous win for borrowers.”
He 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.”
The Trump administration had previously paused student debt relief efforts, removing IDR enrollment access and halting processing for months.
Though those processes resumed later, it wasn’t until the legal action that the administration publicly committed to following through on cancellations.
What Happens Next
The Education Department began emailing eligible borrowers in October with options to accept or opt out of the debt cancellation. Most loan discharges are expected to be processed within two weeks of Oct. 21.
Borrowers covered by the agreement won’t need to take additional action if they’re already enrolled in one of the qualifying repayment plans and have met the payment timeline.
The AFT emphasized that it will continue to monitor the government’s compliance.
“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,” Weingarten said.
The joint filing still requires court approval, but with both parties in agreement and strong legal backing, the relief is expected to move forward.
For borrowers who have waited years for the promises of debt relief to be honored, the agreement represents long-overdue action, and some long-awaited peace of mind.