The American Federation of Teachers and the U.S. Department of Education have temporarily resolved key disputes in a major federal lawsuit challenging the handling of income-driven repayment and forgiveness programs.

In a joint status report filed Friday (PDF File) in the U.S. District Court for the District of Columbia, both sides asked Judge Reggie B. Walton to deny, for now, the union’s motions for a preliminary injunction and class certification. Those motions sought immediate relief for borrowers who said they were wrongly denied or delayed in receiving debt cancellation.

The agreement allows the Education Department to continue processing student loan forgiveness under the Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay As You Earn (PAYE) programs while the lawsuit remains pending.

The AFT had filed suit earlier this year, alleging that the Department was failing to provide legally required repayment plans and loan forgiveness. The lawsuit has a potential impact on millions of borrowers navigating overlapping repayment rules and deadlines.

Key Terms Of The Agreement

The new joint filing outlines a detailed temporary framework meant to protect borrowers as litigation continues:

• No More Denials for “Partial Financial Hardship.” The Department agreed not to reject any borrower applying for the IBR plan solely because they lack a “partial financial hardship,” a standard rooted in a decades-old definition from the Higher Education Act. Borrowers denied on this basis since July 4, 2025, will be invited to reapply once the Department’s systems are updated.
• Continued Loan Discharges. Borrowers already eligible for cancellation under IBR, ICR, or PAYE will continue to see their loans discharged, and the Department confirmed that those whose payments exceed their final qualifying amount will receive reimbursements.
• Clarified Tax Treatment. The Education Department affirmed that it will not issue IRS Form 1099-C for borrowers whose loans are discharged in 2025, provided conditions in IRS Notice 2022-1 apply. However, the agency noted that final tax determinations remain under the authority of the IRS and the Treasury Department.
• Public Transparency. Over the next several months, the Department must file six public status reports detailing application volumes, pending cases, decisions, and discharges across the income-driven repayment and Public Service Loan Forgiveness (PSLF) Buyback program. The first report will be due within 30 days after the current government shutdown ends.

The first report must also explain how the Department identifies borrowers eligible for discharge and disclose how many IBR applications were denied after July 4 on financial-hardship grounds.

What This Means For Student Loan Borrowers

For millions of Americans still repaying student loans, the agreement signals both relief and continued uncertainty. By halting hardship-based denials, the Education Department effectively ensures that borrowers leaving the Saving on a Valuable Education (SAVE) plan or other repayment programs won’t lose eligibility due to outdated definitions.

Borrowers who became eligible for cancellation in 2025 under income-driven plans will be treated as having their loans discharged as of their eligibility date, not the later date when paperwork is processed. This clarification could prevent tax complications.

The inclusion of PSLF “Buyback” data also reflects ongoing efforts to monitor the program, which allows borrowers to receive credit for earlier periods of qualifying payments, but is experiencing significant delays.

What Comes Next

The court must still approve the agreement. If accepted, the case will remain open but paused while the Department issues its reports and implements system updates.

For now, the most immediate benefit will be clarity for borrowers who applied for IBR after July 4, 2025, but were rejected on financial-hardship grounds. Those individuals will have an opportunity to reapply once processing systems are fixed – expected in Winter 2025.

Borrowers, meanwhile, will at least get more transparency in what’s happening with the student loan system amidst the changes.

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