Student Loan Forgiveness Resumes Under IBR Plan: What Borrowers Need to Know
After a period of uncertainty and legal challenges, the Department of Education (DOE) has resumed a key student loan forgiveness program, offering relief to millions of borrowers enrolled in Income-Based Repayment (IBR) and other income-driven repayment plans. This development follows a lawsuit filed by the American Federation of Teachers (AFT) and a subsequent agreement with the Trump administration, resolving concerns about blocked loan forgiveness and potential tax liabilities.
Background: The IBR Program and Recent Disruptions
The Income-Based Repayment (IBR) plan is one of four major federal programs designed to make student loan repayment more manageable by tying monthly payments to a borrower's income and family size. Under the IBR plan, payments are typically set at 15 percent of discretionary income for most borrowers, or 10 percent for new borrowers after July 1, 2014. A key feature of the IBR plan is the promise of loan forgiveness after 20 or 25 years of qualifying payments, allowing borrowers to have their remaining balances canceled.
However, earlier this year, the DOE halted discharges under the IBR plan, citing system updates tied to court injunctions affecting other income-driven repayment programs. This pause, despite IBR itself remaining statutorily authorized, prompted the AFT to file suit against the Department of Education, arguing that the freeze was unlawful and unfair to borrowers who had faithfully met all the requirements.
The July pause of IBR discharges coincided with the enactment of the One Big Beautiful Bill Act, which reduces borrower repayment options and is expected to phase out multiple income-driven plans by 2026. Legal actions, particularly around the SAVE plan, also contributed to this disruption. The Department of Education previously cited a need to update forgiveness calculations in response to court activity tied to these evolving policies.
Resumption of Forgiveness Processing and Key Provisions
The agreement between the AFT and the Department of Education marks a significant victory for borrowers. Under the terms of the agreement, the DOE has agreed to resume processing student loan forgiveness not only under the IBR plan, but also the ICR and PAYE plans, as well. The department had maintained that student loan forgiveness was not allowable under ICR and PAYE following a court ruling in the SAVE plan litigation earlier this year, but the AFT had disputed this. Until now, the department had advised borrowers who qualify for student loan forgiveness under ICR and PAYE that they would need to switch to the IBR plan to receive a discharge. Borrowers who were working toward debt cancellation under the Income-Based Repayment (IBR) plan are now receiving notices that they still qualify for relief, and cancellations started last week.
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The department also agreed to “continue processing applications for Public Service Loan Forgiveness (PSLF) Buybacks,” although the program continue to suffer from significant backlogs and delays.
According to reports, the DOE expects most discharges to be processed within weeks after an opt-out deadline of Oct.
Shielding Borrowers from Tax Liability
One of the most critical aspects of the agreement is the provision to shield borrowers who qualify for student loan forgiveness from potential tax liability. Under the American Rescue Plan Act of 2021, student loan forgiveness under all IDR plans has been tax free for the last four years. But that relief is set to end on December 31, as Congress declined to extend that relief beyond this year. The AFT argued that this would lead to catastrophic tax consequences for borrowers who qualify for student loan forgiveness now, but don’t receive it until next year or beyond because of the department’s ongoing processing pauses and delays.
To address this concern, the department has agreed that for their internal purposes, the date a borrower becomes eligible to have their loans cancelled under the IBR, Original ICR, or PAYE plans constitutes the effective date of their loan discharge. The DOE will not file an Internal Revenue Service (IRS) Form 1099- C for a borrower who becomes eligible for discharge in 2025 if the conditions in IRS Notice 2022-1 are met. A Form 1099-C is the tax form that typically would be issued to borrowers that would require them to report the amount of cancelled debt as “income” for tax purposes, leading to potentially devastating tax consequences.
The department further clarified that this tax protection will shield borrowers who qualify for student loan forgiveness under the SAVE plan, but switch to either IBR, ICR or PAYE before the end of the year. Loan forgiveness under SAVE remains blocked due to a separate injunction by the Eighth Circuit Court of Appeals.
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Importantly, under the terms of this provision, SAVE plan borrowers who have reached their student loan forgiveness eligibility threshold must apply to switch to IBR, ICR or PAYE on or before December 31, 2025.
The department also promised that borrowers who have made payments beyond the requisite amount required to receive student loan forgiveness will “be reimbursed for any payments made on the loan after the final payment that qualified them for discharge.”
Eligibility and Opt-Out Options
To qualify for discharge under the IBR plan, borrowers typically must have made roughly 20 to 25 years of payments, depending on loan origination. The notifications are being sent in stages. Those not included in this round remain eligible for future review and relief once system updates and legal issues are resolved.
Borrowers may opt out of the IBR forgiveness by October 21, 2025, if they wish. One incentive to opt out is to avoid possible state tax liability, as forgiven debt may be taxable under some state laws. Opting out would mean continuing current loan payments.
Remaining Challenges and Delays
While the resumption of the IBR program is a positive step, it does not resolve all the challenges in the student debt landscape. Many borrowers under other income-driven repayment plans (like SAVE, PAYE, or ICR) are still facing delays or legal barriers tied to court rulings.
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Not all federal borrowers have been included in the resumed relief. Those in the Public Service Loan Forgiveness (PSLF) program, which wipes out debt after 10 years of public service employment, face particular delays: as of late August, over 74,500 applications awaited processing by the Department of Education.
Impact and Perspectives
The loan relief will offer tangible benefits and help recipients restore creditworthiness, open access to mortgages, and create new opportunities for borrowing and financial stability.
Almost 2 million people may finally see relief after years of waiting. But it’s important to understand that while some borrowers may hesitate out of fear of tax liabilities, opting out of forgiveness could lead to more financial burden down the road.
This student forgiveness program has been subject to legal scrutiny over the last two years, but now the process of approving prior submissions is resuming, and that is welcome news to borrowers who applied. For those who applied and may qualify, be sure to check your provider's portal to see if approved what the next steps are. The harsh reality is future forgiveness options will be limited, and you need to take advantage of this forgiveness initiative if you qualify.
Monitoring Compliance and Future Developments
While the agreement announced on Friday will resolve the immediate issues associated with the AFT’s legal challenge, it does not formally end the lawsuit. The department agreed to file monthly status reports detailing its progress in implementing the agreement so that the AFT, the court, and the public at large can monitor the department’s compliance.
The department agreed to file six status reports that provide public information about certain topics raised in this litigation.
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