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In a significant move for borrowers, President Donald Trump’s Department of Education has agreed to process over two million additional Student Loan Forgiveness claims under income-driven repayment (IDR) and public service programs.

The agreement, reached with the American Federation of Teachers (AFT) on October 17, marks a major development in the ongoing battle over student debt relief — and could shield some borrowers from facing new taxes in 2026.

Student Loan Forgiveness Agreement Reached

According to court filings in AFT v. U.S. Department of Education, the Department of Education agreed to resume processing forgiveness applications for borrowers who have reached their repayment milestones under income-driven plans such as:

• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)
• Pay As You Earn (PAYE)

Additionally, the agreement ensures continued buyback processing for the Public Service Loan Forgiveness (PSLF) program, allowing borrowers to “buy back” time spent in deferment or forbearance if it helps them reach the required 120 qualifying payments for full debt cancellation.

AFT President Randi Weingarten celebrated the outcome, stating:

“Our agreement means that those 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.”

More Information

Status Report – #54 in AMERICAN FEDERATION OF TEACHERS v. U.S. DEPARTMENT OF EDUCATION (D.D.C., 1:25-cv-00802) – CourtListener.com

Trump Limits PSLF, Student-Loan Forgiveness for Public Servants - Business Insider

Student-Loan Forgiveness Delays Are Straining Millions of Borrowers - Business Insider

Avoiding a 2026 Tax Trap

Under the American Rescue Plan Act of 2021, student loan forgiveness is tax-free through 2025. Without this new agreement, borrowers receiving discharge after January 2026 could owe thousands in federal taxes.

To prevent that, the Department of Education will now use the eligibility date — the moment a borrower qualifies for discharge — rather than the official discharge date for tax purposes. This adjustment could save borrowers from owing additional taxes next year.

However, the IRS and the Treasury Department retain the “final say” on whether forgiven balances will count as taxable income.

Political and Legal Context

The Business Insider report noted that AFT initially sued the Education Department in March over delays in processing IDR applications, later expanding the suit into a class action representing millions of borrowers. Both sides now want the court to enter the agreement as an official order.

A Department spokesperson credited Trump’s policies for restarting relief:

“Thanks to the Trump Administration’s efforts to separate out the illegal loan cancellation schemes, we are able to process legitimate loan cancellations once again.”

The deal also comes as Trump’s administration implements broader structural changes to federal student loans — including consolidating existing repayment plans into two simplified options starting in July 2026 and resuming collections on defaulted loans after a five-year pause.

The Broader Impact on Borrowers

For millions of Americans, the new Student Loan Forgiveness processing agreement is a long-awaited victory. It offers clarity for public service workers, teachers, and low-income borrowers navigating years of bureaucratic uncertainty.

While the political battle over loan relief continues, this agreement reflects an emerging consensus: that borrowers who have made years of qualifying payments deserve the relief they were promised.

As Weingarten summed up:

“For far too long, Washington has made borrowers jump through hoops for relief they’ve earned. This agreement is a step toward restoring fairness and faith in the system.”