The past year has been a tumultuous one for anyone trying to keep current with the state of student loans, marked by legal challenges, court rulings and a processing backlog in the millions. And December 31, 2025 is marking an unexpected deadline for action for a group of student loan borrowers qualified for loan forgiveness to act, or they’ll end up on the hook for thousands.
Early December marked the end of the road for the Saving on a Valuable Education (SAVE) Plan, a Biden-era student loan program under which debt repayments were linked to borrower income. The plan has been tied up in court after legal challenges filed by a group of red states last year. (1) SAVE qualified borrowers for loan forgiveness after a certain number of years of repayment, but while the legal battle ground on, loan forgiveness for SAVE borrowers was also blocked. (2)
The proposed joint settlement agreement between the U.S. Department of Education and the State of Missouri announced on December 9 spelled out the end of the program. (3) The seven million borrowers enrolled in SAVE and the almost half a million who have applied to join SAVE will have to select and apply to a different repayment plan.
Currently, plans include the Income-Based Repayment (IBR), Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans. However, ICR and PAYE will be phased out by July of 2028, which is also the sunset timeline for SAVE.
A separate, but intersecting, development concerns the changing tax status of forgiven loans. Loan forgiveness for borrowers on income-driven repayment (IDR) programs was made exempt from taxation under the Covid-era stimulus package American Rescue Plan Act of 2021, until the end of 2025. (4) This tax break hasn’t been extended, meaning that starting on January 1, 2026, discharged loan balances will be construed as income and taxed as such.
In a letter sent to Secretary of the Treasury and acting IRS Commissioner Scott Bessent from a group of Democrat senators in November, the current administration was exhorted to “protect working class families” by using existing administrative authorities. (5) These include the insolvency exclusion, the scholarship exclusion and the general welfare exclusion to defuse the approaching IDR “tax bomb.”
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The Department of Education (DoE) has agreed to resume processing student loan forgiveness for borrowers of certain income dependent repayment plans. This is due to the agreement struck to resolve a different lawsuit brought by the American Federation of Teachers (AFT) against the DoE in March of this year, alleging deliberate attempts to block access to some programs. (6)
Most importantly for borrowers eligible to have their debts cancelled, the agreement stipulates that the date a borrower became eligible for loan forgiveness will be treated “as the effective date of discharge.” This means that those who became eligible before the tax rules change won’t be subject to them. So, a borrower who crossed the eligibility threshold before the end of 2025 won’t be on the hook for a tax bill that treats the forgiven loan as income, even if the actual date of discharge doesn’t happen until 2026. This measure applies to borrowers enrolled in IBR, ICR or PAYE plans.
In a statement issued in the wake of October’s Joint Status Report signalling the end of AFT v. U.S. Department of Education, AFT president Randi Weingarten said, “Our agreement means that those borrowers stuck in limbo can either get immediate relief or finally see a light at the end of the tunnel. And, crucially, they won’t ever get taxed on that relief.” (7)
Winston Berkman-Breen, legal director of Protect Borrowers, formerly Student Borrower Protection Center, which represented the AFT in the suit, called out the tax implications, saying “borrowers can rest a little easier knowing that they won’t be unjustly hit with a tax bill once their student loans are finally canceled, pursuant to federal law.”
Where does all this leave SAVE borrowers who have qualified for student loan forgiveness? Having to scramble to switch to a different income-driven plan – and they have a matter of days (until December 31, 2025) to act if they want to be shielded from a hefty tax bill.
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Missouri Attorney General (1); CourtListener (2, 6); U.S. Department of Education (3); GovInfo (4); Elizabeth Warren (5); American Federation of Teachers (7)
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