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Legal Breakthrough for Student Loan Borrowers
Millions of student loan borrowers have secured a significant victory through a court-approved agreement between the U.S. Department of Education and the American Federation of Teachers, according to reports. The settlement resolves a legal challenge over processing delays that had halted loan forgiveness under multiple income-driven repayment plans.
Sources indicate the agreement, filed in federal court on Friday, requires the Department of Education to resume processing student loan cancellations under the Income-Based Repayment (IBR), Income Contingent Repayment (ICR), and Pay As You Earn (PAYE) plans. The department had previously paused these discharges following litigation surrounding the SAVE plan, but the AFT had contested the legality of these pauses.
Tax Liability Protection for Borrowers
In what analysts suggest is a critical development, the agreement includes provisions to shield borrowers from potential tax consequences. Under the terms, the Department of Education will treat the date a borrower becomes eligible for forgiveness as the effective discharge date for tax purposes, even if processing delays push the actual discharge into 2025 or beyond.
“This is a tremendous win for borrowers,” said Winston Berkman-Breen, Legal Director for Protect Borrowers, which has been representing the AFT in its lawsuit against the Department of Education. “Borrowers can rest a little easier knowing that they won’t be unjustly hit with a tax bill once their student loans are finally cancelled.”
Background of the Legal Challenge
The agreement resolves a lawsuit originally filed by the American Federation of Teachers earlier this spring over massive delays in processing income-driven repayment applications. The union had argued these delays were preventing borrowers from accessing congressionally-mandated debt relief under both income-driven repayment plans and Public Service Loan Forgiveness programs.
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According to the report, the AFT amended its complaint last month to include allegations that the department was illegally blocking student loan forgiveness under ICR, PAYE, and IBR plans. The union contended that only the SAVE plan was subject to legitimate legal restrictions due to a separate court injunction.
Key Provisions of the Settlement
Under the agreement, the Department of Education will continue processing loan cancellations for borrowers eligible under IBR, ICR, and PAYE plans as long as these plans remain in effect. The report states that ICR and PAYE are scheduled to continue until July 2028 under the “One Big, Beautiful Bill Act.”
The department also agreed to continue processing applications for the Public Service Loan Forgiveness Buyback program, despite acknowledged backlogs and delays. Additionally, borrowers who have made payments beyond the amount required for forgiveness will reportedly be reimbursed for those excess payments.
SAVE Plan Borrower Options
For borrowers enrolled in the SAVE plan—which remains blocked from processing discharges due to a separate injunction—the agreement provides a pathway to access forgiveness through other plans. The department clarified that SAVE borrowers who have reached eligibility thresholds can apply to switch to IBR, ICR, or PAYE on or before December 31, 2025, and still receive protection from tax liability.
The pay-as-you-earn tax implications had created urgency in the litigation, as tax-free treatment of student loan forgiveness under the American Rescue Plan Act is set to expire at the end of 2025.
Ongoing Monitoring and Compliance
While the agreement resolves immediate issues, it does not formally end the lawsuit. The Department of Education has committed to filing six monthly status reports detailing its progress in implementing the terms, allowing the AFT, the court, and the public to monitor compliance.
“We fully intend to hold them to their word,” Berkman-Breen stated, indicating close oversight of the department’s implementation efforts over the next six months.
The settlement document filed with the court outlines specific timelines and reporting requirements. Meanwhile, industry developments in other sectors continue to evolve, as do recent technology innovations and related innovations in cybersecurity.
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