Student loan borrowers across the United States are facing growing uncertainty as the Trump administration’s delays in processing income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF) applications pile up. Court filings reveal that more than 1.3 million borrowers remain stuck in a backlog of IDR applications, while over 72,000 await decisions on PSLF eligibility.

The American Federation of Teachers (AFT), representing 1.8 million members, has launched a lawsuit against the Department of Education. The union alleges that borrowers entitled to debt forgiveness are being denied access to repayment options that could lead to loan cancellation. The delays, they argue, could expose borrowers to devastating financial consequences.

Student Loan Forgiveness Tax-Free Period Nears End

One of the most pressing concerns is the expiration of the American Rescue Plan Act of 2021’s tax-free forgiveness provision, which shields borrowers from federal tax liability. This protection ends on December 31, 2025.

If the Department of Education fails to process forgiveness applications in time, borrowers whose debt is cancelled in 2026 may be treated as though they received taxable income. Experts warn that this could result in tax bills exceeding $12,000 for borrowers with average balances of $57,000, depending on their income bracket.

Legal and Political Tensions Rise

Lawmakers, including Sen. Bernie Sanders (I-Vt.), have urged Education Secretary Linda McMahon to accelerate forgiveness approvals. In a recent letter, they cautioned that borrowers could face “significant tax bills on debt relief that should have been granted without penalty.”

Despite this pressure, court filings show little improvement in processing speed. In August, the Department processed 305,000 IDR applications and 5,600 PSLF buyback requests. However, over a million borrowers remain in limbo, with AFT accusing the Department of “actively harming borrowers.”

READ ALSO

Luigi Mangione Terrorism Charges Dismissed in Brian Thompson Murder Case: Here’s what to know

Keir Starmer rocked by ally’s exit over Abbott remarks as Trump lands in UK

The Financial Burden of Forgiveness Taxes

For borrowers in the 22% tax bracket, having $57,000 in loans forgiven could lead to a $12,540 federal tax liability. Even those in the 12% bracket would face around $7,000 in taxes. State-level tax burdens could make the situation worse, as many states mirror federal policy.

An exception exists for the PSLF program, where loan forgiveness is not taxed federally. However, some borrowers may still face state-level taxation. This raises additional concerns for teachers, nurses, and nonprofit workers relying on PSLF to ease their financial burdens.

What Borrowers Should Do Now

Experts recommend that borrowers who expect forgiveness in 2025 keep detailed payment records with their loan servicers to prove eligibility during the tax-free window. For those likely to see forgiveness in 2026, financial planners advise setting aside savings for a possible tax bill or arranging an IRS payment plan to spread out the cost.

Borrowers experiencing hardship may also qualify for tax relief programs that could reduce or eliminate their liability. However, consumer advocates stress that time is running out for millions of borrowers caught in administrative delays.

 

Below is a comprehensive, SEO-optimized FAQ that captures the top search queries about student loan forgiveness, IDR/PSLF delays, and the looming tax issue for 2026. Each answer is concise, factual, and written to target People-Also-Ask style queries and Google Discover. Where numbers or dates are cited, they reflect reporting through September 16, 2025.

Frequently Asked Questions (FAQ)

Q1: Will student loan forgiveness be taxed in 2026?

A1: Possibly. The American Rescue Plan Act of 2021 made federal student-loan forgiveness tax-free through December 31, 2025. Unless Congress acts to extend or make that exemption permanent, forgiveness processed in 2026 could be treated as taxable income at the federal level.

Q2: Who is most at risk of a tax bill on forgiven student loans?

A2: Borrowers whose IDR (income-driven repayment) or other forgiveness that would otherwise have been processed in 2025 remains unprocessed until 2026 are most at risk. The AFT and some lawmakers warn that eligible borrowers stuck in the backlog could face substantial federal (and possibly state) tax bills.

Q3: What is the current IDR/PSLF backlog and processing status?

A3: As of court filings and agency updates in mid-September 2025: more than 1.3 million borrowers were waiting on IDR applications, and about 72,000–74,000 applicants awaited PSLF determinations. The Department of Education reported processing roughly 305,000 IDR applications in August 2025, but millions remained in limbo.

Q4: How much tax could I owe if my loan is forgiven in 2026?

A4: That depends on the forgiven amount and your tax bracket. Using an average forgiven balance of $57,000: at 22%, federal tax could be about $12,540; at 12%, about $6,840. State taxes could add more if your state taxes cancellation income.

Q5: Is Public Service Loan Forgiveness (PSLF) taxed?

A5: Federal law exempts PSLF from federal income tax, debt cancelled under PSLF is not taxed at the federal level. However, some states may treat forgiven amounts differently, so check your state tax rules.

Q6: What are income-driven repayment (IDR) plans and how do they lead to forgiveness?

A6: IDR plans (IBR, PAYE, REPAYE, ICR, etc.) cap monthly federal student loan payments at a percentage of discretionary income; after 20 or 25 years of qualifying payments (depending on plan), the remaining balance can be forgiven.

Q7: How can I check my IDR or PSLF application status?

A7: Check your servicer account and the Federal Student Aid (FSA) portal (studentaid.gov). Contact your loan servicer directly and keep correspondence records. If you believe there’s an error, escalate to FSA or the Federal Student Aid Ombudsman.

Q8: What should I do now if I’m eligible for forgiveness but still waiting?

A8: (1) Save and back up all payment records and servicer communications; (2) follow up with your servicer and FSA; (3) consider documenting proof that you were eligible for cancellation in 2025 (to support tax arguments); (4) consult a tax professional about potential 2026 exposure.

Q9: Can I avoid taxation if my forgiveness is delayed into 2026?

A9: There is no guaranteed way to avoid taxation if forgiveness is processed in 2026 unless Congress extends the tax exemption. However, retaining documentation proving eligibility prior to Dec 31, 2025 may support relief or administrative fixes later, so keep meticulous records.

Q10: If my loans are forgiven in 2026 and taxed, can I get relief later?

A10: Potentially, Congress could retroactively exempt forgiven amounts from tax or the IRS could adopt relief measures. If that happens, taxpayers may be able to amend returns. Keep records and consult a tax advisor when/if policy changes occur.

Q11: How can I prepare financially for a possible tax bill on forgiven loans?

A11: Start setting aside funds if you expect forgiveness in 2026. Consider estimating your potential tax using your expected bracket and forgiven balance. If taxed, you can request an IRS installment plan to spread payments.

Q12: Are there programs to reduce or eliminate a tax bill if I can’t pay?

A12: The IRS offers hardship programs, offers in compromise, and installment agreements for taxpayers who cannot pay in full. Eligibility depends on income, assets and circumstances, consult a tax professional.

Q13: Why are IDR and PSLF applications delayed?

A13: Delays stem from administrative backlogs and policy changes at the Department of Education. The backlog rose during system overhauls and after surges in applications following previous relief announcements. Advocacy groups allege the current administration slowed processing; agency filings show processing improved but millions remained waiting as of mid-2025.

Q14: What is the AFT lawsuit about?

A14: The American Federation of Teachers (AFT) sued the U.S. Department of Education alleging eligible borrowers are being denied timely access to IDR and PSLF benefits. In filings, the AFT warns delays could produce large tax liabilities for borrowers.

Q15: If I’m in the PSLF queue, how long will it take?

A15: Processing times vary. As of mid-September 2025, thousands were still awaiting determinations; some applicants saw months of delay. The Department reported processing tens of thousands monthly, but no guaranteed timeline exists, stay in contact with your servicer and submit requested documentation promptly.

Q16: Does consolidation affect forgiveness or taxes?

A16: Consolidating loans can affect PSLF and IDR eligibility: consolidation may reset your qualifying payment count for PSLF, so consult servicer guidance before consolidating. Consolidation itself doesn’t change tax treatment of future forgiveness.

Q17: Which forgiven amounts are definitely tax-free?

A17: Forgiveness under PSLF is federally tax-free. Forgiveness processed by Dec 31, 2025 under the American Rescue Plan provision is federally tax-free. Any forgiveness processed in 2026 may be taxable unless law changes.

Q18: Should I stop making payments to avoid taxes?

A18: No. Do not stop payments. Missing payments can damage credit and delay eligibility. Continue to follow your servicer’s instructions and maintain payment records.

Q19: How do state taxes impact forgiven loans?

A19: Some states follow federal tax law and also exempt forgiven student loans; others may tax forgiven amounts. Check your state tax code or consult a state tax professional for specifics.

Q20: How can I contact my loan servicer or get official help?

A20: Use the contact information on your servicer’s website, your servicer portal, and studentaid.gov for Federal Student Aid resources. If unresolved, file a complaint with FSA or contact the Federal Student Aid Ombudsman for help.

Q21: What documentation should I keep to protect myself?

A21: Keep payment histories, servicer emails and letters, IDR/PSLF application confirmations, annual income documentation used for IDR (tax returns/W-2s), and screenshots or PDFs of your servicer portal showing application dates/status.

Q22: If I already received forgiveness in 2025, am I safe from tax?

A22: If cancellation was processed and finalized in 2025, it should be sheltered by the American Rescue Plan’s exemption and not taxed federally. Retain proof of the forgiveness date and documentation.

Q23: Can advocacy or legal action help borrowers in the backlog?

A23: Lawsuits (like AFT’s) and Congressional pressure can increase scrutiny and potentially accelerate processing or spur legislative fixes. Follow reputable news and official agency updates for developments.

Q24: Where can I find reliable updates?

A24: Check the U.S. Department of Education, Federal Student Aid (studentaid.gov), major reputable news outlets, and announcements from your loan servicer for authoritative updates. Lawmakers’ letters and court filings may also provide status snapshots.

Q25: Should I consult a tax professional?

A25: Yes, especially if you believe you may be subject to a large tax bill from loan forgiveness. A tax professional can estimate liabilities, advise on payment plans, and assist with tax planning and possible amendments if laws change.