In a major development for student borrowers, President Donald Trump’s Department of Education has reached an agreement with the American Federation of Teachers to process additional student-loan forgiveness claims — protecting borrowers from potentially large tax bills.

Under the agreement, the department will continue handling forgiveness applications for those on income-driven repayment plans, including income-based, income-contingent, and Pay As You Earn plans, as long as the plans remain active.

The deal also covers Public Service Loan Forgiveness buybacks, allowing borrowers to “buy back” deferment or forbearance periods that count toward the 120-payment threshold for debt relief. Any payments made after reaching the qualifying number of payments will be reimbursed.

The timing is particularly significant. A 2021 provision in the American Rescue Plan made student-loan forgiveness tax-free through 2025, meaning that starting January 2026, borrowers receiving relief could face thousands of dollars in new taxes.

To address this, the department will allow borrowers to report the date they become eligible for loan discharge as the effective date, rather than the official discharge date. For example, a borrower reaching their required payments in November but receiving relief in January will not be taxed on the forgiven amount.

“This agreement ensures borrowers stuck in limbo can finally see relief — without facing new taxes,” said AFT President Randi Weingarten. The union had sued the Department of Education earlier this year, citing delays in processing income-driven repayment applications.

A spokesperson for the Department of Education credited the Trump administration’s separation of illegal loan cancellation schemes for enabling legitimate loan forgiveness to resume.

The agreement follows the administration’s resumption of loan forgiveness processing, after a pause over the summer. Multiple borrowers have already been notified that their loans may be discharged in the coming months.

The Trump administration has also made major changes to student-loan repayment:

• Existing income-driven repayment plans were replaced with two new options, set to phase in July 2026.

• Collections on defaulted student loans resumed in May after a five-year pause.

This agreement marks a significant step toward resolving long-standing delays and ensuring borrowers receive the relief they are entitled to, while avoiding unexpected tax liabilities.

Reporting by Noko David