Student Loan IDR/PSLF Class Action: Settlement, Taxes, Backlog

The class action settlement in American Federation of Teachers v. U.S. Department of Education, filed with the court on October 17, 2025, requires the Department to resume processing applications for Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn, and PSLF Buyback; to treat the date you actually became eligible as your discharge date; to refund payments you made after you qualified for forgiveness; and to avoid issuing tax forms suggesting your canceled debt is taxable when your effective discharge date is on or before December 31, 2025.¹ Borrowers do not have to opt in. If you fit one of the groups the case covers, the settlement applies to you.

What the Settlement Requires the Department To Do

The Department made five commitments under judicial supervision. It agreed to keep processing applications for the three statutory income-driven plans (IBR, ICR, PAYE) and for PSLF Buyback as long as those programs remain in effect. It agreed to stop denying IBR applications on the ground that a borrower lacks a “partial financial hardship,” and to let anyone denied on that basis since July 4, 2025, reapply. It agreed to backdate discharges to the date the borrower actually became eligible, rather than the date a staffer got around to the file. It agreed to refund borrowers who kept making payments after they had already earned forgiveness. And it agreed to file six status reports at 30-day intervals detailing how many applications came in, how many were pending, and how many were processed.¹

On October 23, 2025, Judge Reggie B. Walton denied the plaintiffs’ motions for a preliminary injunction and class certification without prejudice, stayed the case, and directed both parties to comply with the settlement terms.² The “without prejudice” language matters: the AFT can refile if the Department fails to hold up its end.

Who the Settlement Covers

The AFT’s amended complaint, filed September 9, 2025, identified five borrower groups. You are covered if you fit any of them:³

You have an IDR application sitting unprocessed.
Your IBR application was denied after July 4, 2025, because the Department said you lacked a “partial financial hardship,” or because you chose the lowest monthly repayment option on the form.
You have made the 20 or 25 years of payments required for IBR cancellation but have not received it.
You have satisfied the payment requirements under ICR or PAYE but are still waiting for cancellation.
You have met the 120-month public service requirement for PSLF but your forgiveness is blocked because your Buyback application has not been processed.

No enrollment step is required. If the settlement is honored, the relief flows to eligible borrowers automatically.⁴

If Your IBR Application Was Denied for “Partial Financial Hardship”

After the One Big Beautiful Bill Act was signed on July 4, 2025, the Department began denying IBR applications on grounds that were no longer valid. The law eliminated the partial financial hardship requirement for IBR enrollment immediately upon enactment.⁵ Under the settlement, borrowers denied for that reason on or after that date are entitled to reapply, and the Department has to stop using the denial rationale going forward.¹

How Your Discharge Will Be Taxed

The tax treatment of your forgiven balance depends on one date: your effective discharge date. Under the American Rescue Plan Act, discharged federal student loan debt was excluded from taxable federal income through December 31, 2025. The settlement’s backdating rule matters here. Because the Department has to treat the date you actually qualified as your effective discharge date, borrowers whose eligibility landed on or before December 31, 2025 keep the tax exclusion even if their paperwork was not processed until later. For those borrowers, the Department agreed not to issue IRS forms suggesting the canceled debt is taxable.¹ CNBC reported that more than 2.5 million borrowers were enrolled in ICR and PAYE alone.⁶

Borrowers whose discharges take effect on or after January 1, 2026 face a different picture. The American Rescue Plan tax exclusion expired at the end of 2025, and forgiveness under IDR plans is now potentially subject to federal tax.⁷ The One Big Beautiful Bill Act made a permanent tax exemption only for loans discharged due to death or disability, leaving IDR forgiveness exposed.⁸

The dollars involved are not small. About 62% of borrowers who earn IDR forgiveness make $50,000 a year or less, and two-thirds of that group have less than $1,000 in savings. With the average forgiven balance around $49,321, the resulting tax bill could range from $5,800 to over $10,000. Nine Democratic senators, including Elizabeth Warren and Bernie Sanders, sent a November 2025 letter urging Treasury and the IRS to permanently exclude IDR forgiveness from taxable income by regulation. Neither agency has publicly committed to doing so.⁹

PSLF is a separate matter. Forgiveness under PSLF remains tax-free at the federal level and is unaffected by the ARPA expiration.¹⁰

What the Backlog Looks Like

Processing is moving, but slowly. Between May and December 2025, the Department reduced the IDR backlog by roughly 848,000 applications, bringing the pending total to 734,221 by year’s end. December 2025 alone saw 258,465 new IDR applications arrive, with 242,655 approved and 34,476 denied.¹¹

PSLF Buyback is the slower queue. It closed 2025 with 83,370 pending applications, and by April 2026 the backlog was around 88,000, with the Department processing 6,870 determinations that month against 4,790 new submissions.¹² Some Buyback applicants have reported waiting more than a year, and in some cases over two years, for a determination.¹³

Staffing is part of the story. As of April 2026, the Office of Federal Student Aid had 1,065 full-time employees, down from 1,444 under the previous administration, following a March 2025 reduction in force. The office has announced plans to hire 334 additional staff, a 45% increase over April 2026 levels.¹²

IBR discharges resumed in September 2025, and the Department has updated its systems to resume discharges for PAYE and ICR as well.⁷

What the Settlement Does Not Fix

Three things fall outside this settlement even though they affect many of the same borrowers.

The SAVE plan is not coming back. The Eighth Circuit’s February 2025 injunction blocked SAVE, and Congress mandated its termination through the One Big Beautiful Bill Act. The Department has been directed to stop enrolling new borrowers in SAVE, deny pending SAVE applications, and transition current enrollees to other plans.¹⁴ More than 7 million borrowers were enrolled in SAVE, and attorney Adam Minsky estimated that absorbing that volume into new IDR applications could take roughly 25 months at the Department’s late-2025 processing rate.¹¹

Loan servicing complaints are a separate lawsuit. The AFT also has a case pending against MOHELA (Case No. 1:24-cv-02460) alleging failure to process PSLF and IDR applications, miscalculated balances, overcharges, withheld refunds, and unreachable customer service, affecting more than 6.5 million borrowers.¹⁵ Relief in that case, if any, will come separately.

The new Repayment Assistance Plan launches July 1, 2026. Borrowers with existing loans may stay on their current IDR plan until July 1, 2028, after which they must move to IBR, a standard plan, or RAP. Anyone who does not choose will be moved into RAP automatically. Forgiveness under RAP comes after 30 years, and RAP-forgiven balances are treated as taxable income.¹⁶¹⁷ Payments under RAP count toward PSLF.⁵

Where the Case Stands Now

As of mid-2026, AFT v. Department of Education (1:25-cv-00802) remains stayed while the court monitors compliance. The Department is filing periodic status reports, and both the IDR and PSLF Buyback backlogs are trending down.² Because class certification was denied without prejudice, the AFT can refile and push the case forward if processing falls short of the settlement’s terms.

If your forgiveness has been delayed and you believe your effective eligibility date fell on or before December 31, 2025, keep records of when you satisfied your program’s payment requirements and any payments you made after that point. Those two facts drive the backdating, the refund, and the tax treatment you are entitled to under the settlement.

1
AFT. Following Lawsuit, AFT and Trump Administration Agree to Deliver Student Debt Relief
2
Civil Rights Litigation Clearinghouse. American Federation of Teachers v. U.S. Department of Education
3
Forbes. These 5 Student Loan Borrower Groups May Be Covered by Class Action Suit
4
Forbes. 5 Takeaways After Student Loan Forgiveness Delays Get Challenged in New Class Action
5
Federal Student Aid Partners. Federal Student Loan Program Provisions Under One Big Beautiful Bill Act
6
CNBC. Trump Student Loan Forgiveness
7
StudentAid.gov. IDR Court Actions
8
Protect Borrowers. Tax Breaks for Billionaires, Tax Bombs for Borrowers
9
CNBC. Tax Bomb May Hit Some Student Loan Borrowers in 2026, Advocates Warn
10
NASFAA. Welcome to 2026: Some Student Loan Forgiveness Is Now Taxable
11
NASFAA. New ED Status Report Shows Gradual Processing of IDR and PSLF Backlog
12
Rep. Debbie Dingell. Dingell Statement on PSLF Buyback Processing
13
Forbes. Student Loan Forgiveness Buyback Program Gets Big Updates in Court Filing
14
TICAS. Dept. of Ed Announces End of SAVE Plan, Offers Little Clarity for Borrowers
15
Forbes. Major Student Loan Servicer Failed 6.5 Million Borrowers, Says Amended Lawsuit
16
NASFAA. Federal Student Aid Changes Under One Big Beautiful Bill
17
PHEAA. How OBBBA Impacts Student Loans: Repayment and Forgiveness