AFT Lawsuit Settlement: Relief for Some Borrowers, Trouble Ahead for Others

Back in March, the Department of Education stopped processing IBR forgiveness applications. The stated reason was a need to update internal systems to comply with the federal court injunction that blocked the SAVE plan.

The problem? IBR forgiveness was never affected by the SAVE plan injunction. There was no legitimate legal reason to freeze it.

The Department also stopped processing forgiveness for Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR) plans, claiming those were somehow tied to the SAVE injunction. PSLF buyback processing slowed to a crawl. Borrowers approaching their 20- or 25-year forgiveness milestones were stuck in limbo, and many were being forced to switch plans just to access their forgiveness.

The American Federation of Teachers — the more progressive of the two big national teachers unions — sued. They won. And the settlement addresses three major issues that had borrowers frozen in uncertainty.

PAYE and ICR borrowers can stay on their plans

The most important change from the settlement: Borrowers on PAYE or ICR can stay on those plans and receive forgiveness without switching to IBR — as long as they reach their required timeline by July 2028.

This is significant because PAYE offers forgiveness after 20 years of qualifying payments, while IBR requires 25 years for most borrowers. If you're on PAYE approaching 20 years, being forced to switch to IBR would have added five more years to your repayment timeline.

The settlement eliminates that requirement through July 2028, when PAYE and ICR are scheduled to sunset and convert to the Repayment Assistance Plan (RAP) for eligible borrowers.

PSLF buyback processing continues

Borrowers who made payments under the wrong repayment plan or to the wrong employer type can still “buy back” qualifying time toward Public Service Loan Forgiveness.

Processing remains slower than ideal, but at least it's moving forward again rather than being completely frozen.

2025 IDR forgiveness remains tax-free

If you qualify for forgiveness in 2025, even if the Department of Education doesn't process it until early 2026, you won't receive a 1099-C requiring you to report the forgiven amount as taxable income.

This is huge for borrowers who received accelerated credit through the IDR Account Adjustment and are sitting right on the edge of their forgiveness threshold.

However, the settlement also confirms what many borrowers feared: the tax bomb returns in 2026. Anyone receiving non-PSLF forgiveness in 2026 or later faces a big tax bill on the forgiven amount. 

Note that this is for IDR forgiveness. PSLF forgiveness remains tax-free regardless of when it's granted.

What borrowers still need to worry about

The settlement resolves the processing freeze, but it doesn't fix everything. There are still some genuinely scary situations out there that could cost you a lot of money or leave you completely stuck with no good options.

The tax bomb is really coming back

This isn't speculation anymore. The settlement confirms it: the tax on student loan forgiveness returns in January 2026 for anyone who gets forgiveness after 2025 and isn't on PSLF.

If you get forgiveness in 2026 or later, you're going to owe taxes on that forgiven amount. 

Depending on your balance, that could be a five-figure or six-figure tax bill.

A lot of borrowers got accelerated credit through the IDR Account Adjustment. People who thought they had five or ten more years suddenly found out they're getting forgiveness in 2025 or 2026. If your forgiveness date falls in 2026 or beyond, you need to start planning for that tax hit now. 

Parent PLUS borrowers are facing a five-alarm fire

If you're a Parent PLUS borrower who has never consolidated your loans, pay very close attention to this.

Any new Parent PLUS loans borrowed after July 2026 are not eligible for anything other than RAP. But Parent PLUS borrowers are specifically excluded from the RAP plan.

Think about what that means. If you miss the consolidation deadline, you'll have access to zero income-driven repayment plans. Zero. 

Your only option would be the Standard 10-Year plan. And if you can't afford that payment? The smartest option might actually be defaulting on your loans, because default triggers wage garnishment at 15%. That's effectively an income-driven payment, even though it destroys your credit and causes all kinds of other problems.

I'm not recommending that. I'm just trying to communicate how bad this situation is for Parent PLUS borrowers who don't consolidate before the deadline.

It’s still very possible to overpay or lose credit

Even with the settlement getting processing moving again, it’s still possible to:

• Pay way too much on your loans
• Not get forgiveness credit when you should
• File taxes the wrong way
• Make consolidation mistakes that accidentally reset your payment counts

The Department of Education isn't exactly known for flawless record-keeping. The settlement doesn't protect you from servicer confusion, bureaucratic errors, or simply not understanding which repayment strategy actually minimizes your total cost.

Where this leaves you

The AFT lawsuit settlement is genuinely good news, but it doesn't address every challenge borrowers face.

If you're not sure how these changes affect your situation or if you should be doing something different with your repayment strategy, we can help you figure that out. Book a student loan consult to get a customized plan for your loans.