A significant number of Americans are now eligible for student loan forgiveness, but there’s a significant detail to consider.
The American Federation of Teachers (AFT) initiated legal action against the White House due to the Department of Education halting the processing of applications for affordable student loan repayment programs. This led to a change in the situation.
Discussions between the AFT and the Department of Education led to an agreement on October 17, allowing certain applicants to receive student loan forgiveness.
The Trump administration announced that student loan forgiveness, as part of the Income-Contingent Repayment (ICR) and Pay as You Earn (PAYE) plans, is expected to benefit over 2.5 million individuals, as reported by CNBC.
Potentially eligible individuals are advised to visit the Federal Student Aid website. However, to avoid receiving a tax bill for discharged loans, prompt action is necessary.
The website outlines: “In certain situations, you can have your federal student loans forgiven, canceled, or discharged. That means you won’t have to pay back some or all of your loan(s).”
The Department of Education has indicated that borrowers qualifying for loan forgiveness in 2025 will not incur federal taxes on these amounts, unless they are on a Saving on a Valuable Education repayment plan.
The SAVE plan is currently impeded by federal court orders and is expected to be nullified by Trump’s proposed legislative changes.
To ensure your forgiven loans remain tax-free, it’s important to transition to an ICR, PAYE, or IBC program before the year’s end to qualify.
If denied for the IBR plan due to insufficient proof of financial hardship, the Department of Education recommends reapplying.
Currently, the department is addressing a backlog of more than 1 million IDR applications, according to CNBC News. The impact of the recent government shutdown on application processing remains uncertain.
The agreement specifies: “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.”
Although federal income taxes will not apply, state income taxes on forgiven loans may be applicable, depending on the borrower’s state of residence.
To ensure clarity on what may or may not be owed to the government, checking individual situations on the Federal Student Aid website is essential.