Reports that the Trump administration planned to reject hundreds of thousands of student loan borrowers’ applications for income-driven repayment began in July.
And now the administration has announced it will deny 460,000 student loan borrowers access to lower repayment plans, which allow students and families to cover household expenses and still make student loan payments by capping monthly costs based on income levels.
The delay caused by the U.S. Department of Education‘s withholding of income-driven repayment (IDR) plans and a looming change in tax laws may result in millions of borrowers owing a huge tax bill if loans are not cancelled by January 1, 2026, as reported by Forbes.
“Unless the department acts quickly to ensure that all borrowers entitled to forgiveness under IBR receive that forgiveness as soon as possible, borrowers who should receive forgiveness before the tax exemption expires could face significant tax bills on debt relief that should have been granted to them without penalty,” 11 Democratic lawmakers wrote to DOE Secretary Linda McMahon in early September.
The letter was signed by Sens. Bernie Sanders of Vermont, a ranking member of the Committee on Health, Education, Labor, and Pensions, Tim Kaine of Virginia, also a HELP member, Ron Wyden of Oregon, Jeff Merkley of Oregon, Kirsten Gillibrand of New York, Elizabeth Warren of Massachusetts, Cory Booker of New Jersey, Richard Blumenthal of Connecticut, Mazie Hirono of Hawaii, Angus King of Maine, Alex Padilla of California and Chris Van Hollen of Maryland.
“We write with grave concern regarding the Trump Administration’s decision to summarily reject 460,000 borrowers’ applications for more affordable monthly student loan payments under income-driven repayment. As working families already navigate rising costs and unprecedented economic uncertainty, your decision to recklessly deny these applications will leave hundreds of thousands of borrowers in the lurch and exacerbate the financial uncertainty that workers and families are experiencing today,” the senators wrote.
A lawsuit filed by the American Federation of Teachers (AFT) against the federal DOE alleges the the withholding of IDR plans and benefits from millions of borrowers in early 2025 caused harm. When borrowers satisfy statutory repayment obligations under an IDR plan, loans are automatically cancelled after 20 or 25 years. Public Service Loan Forgiveness (PSLF) allows cancellation of loan balances after 10 years if the borrower is employed by the government or a not-for-profit organization.
ICYMI: Student loan debt news
- ‘Lawless and shamefully political ruling’: Supreme Court says no to student loan debt forgiveness
- Biden Administration tackles American student loan debt with income-driven payments
- Employers may contribute to student loan debt repayment
- Student loan debt past due for millions who may have paychecks garnished in July
The DOE’s delay in February 2025 did not allow borrowers to recertify income offline and lower monthly bills which led some to default on student loans. Others were denied their right to cancellation of loans through IDR and PSLF.
The lawsuit states that 1,386,406 applications were pending as of July 31, 2025, but the department’s processing rate means more than a year will likely pass before all applications are processed.
On top of the processing delay is the looming tax change from which IDR is not exempt: any cancelled amount of student loan is considered taxable income by the IRS. The American Rescue Plan Act of 2021 legislated that federal student loans cancelled after December 31, 2020 and before January 1, 2026 are not considered taxable.
The AFT lawsuit alleges that borrowers who qualify for loan cancellation through the end of 2025 “will literally pay for the government’s inaction.” According to Forbes, the average federal income tax on cancelled student loan debt in 2025 could be between $5,666 and $6,188 per borrower. State taxes may also be applicable.
The AFT lawsuit was filed in March 2025 and recently filed for class action status, which will allow a large number of individuals to join together and file a single suit, of which the AFT said that borrowers “simply want to pay back their student loans according to the terms that Congress, and their contracts, provide.”
A motion hearing for the lawsuit is scheduled for October 31, 2025 in U.S. District Court in Washington, D.C.
Support AFP
Share
Rebecca Barnabi
