Government shutdown delays student loan forgiveness lawsuit
Workers walk through the crypt of the U.S. Capitol on Wednesday, October 8, 2025 in Washington, DC, USA.
Valerie Plesch | Bloomberg | Getty Images
With union case Borrowers’ wait times for student loan forgiveness may be even longer due to the Trump administration’s holdover during the government shutdown.
The American Federation of Teachers’ legal challenge against Trump officials will be delayed until Congress restores funding to the U.S. Department of Justice, U.S. District Judge Reggie Walton said Oct. 4. filing. The government shut down on October 1 after Democrats and Republicans failed to agree on a spending deal.
In its lawsuit, AFT accused the U.S. Department of Education of denying federal student loan borrowers their educational rights. affordable repayment plan and debt forgiveness opportunities mandated in loan terms.
Consumer advocates say continuing the union’s legal fight could further extend the long wait times borrowers already face. What’s more, the law that protects student loan forgiveness from taxes expires at the end of 2025, meaning borrowers who receive relief after that point could face a bill from the IRS.
“We are very concerned that without judicial intervention, borrowers’ cancellations will not be processed this tax year and they could potentially incur thousands of dollars in tax liabilities,” said Deputy Enforcement Director and Executive Counsel Persis Yu. Protect DebtorsHe serves as a consultant to AFT.
Education Department requested to stay Earlier this month, that was because Justice Department lawyers were banned from working during the government shutdown. Plaintiffs did not oppose this request.
“However, if the closure is not resolved before Friday, we have reserved the right to request it. [the] Briefing resume,” Yu said.
The Department of Education did not respond to a request for comment on loan forgiveness actions. A CNBC reporter’s email to an agency spokesperson was met with an automated message saying, “I will respond to emails once government functions resume.”
Here’s what debtors need to know about paused litigation.
Case focuses on debtors’ backlogs
The AFT, a union with nearly 1.8 million members, filed a lawsuit against the Trump administration in March, accusing officials of blocking borrowers from student loan repayment plans mandated by Congress and a popular loan forgiveness program for government and nonprofit workers. In September, the union amended its complaint to request grievance status.
“Debtors are unable to access affordable monthly payment plans, some borrowers are defaulting on their loans, and some public service workers are being denied their legal right to reduce their monthly payments and earn credit toward Public Service Loan Forgiveness,” the lawsuit states. The statement was included.
As of the end of August, there was a backlog in the Ministry of National Education. 1,076,266 Income-based repayment plan applications, September court records show. This means more than a million people are waiting to enter a new income-driven repayment plan. These plans limit a borrower’s monthly bill to a portion of their income and cause the debt to be erased after a certain period of time.
Meanwhile there is more than one 74,000 Pending applications from borrowers hoping to qualify for the Public Service Loan Forgiveness Redemption program. PSLF offers debt forgiveness to some public officials after ten years.
“The backlog provides evidence that the U.S. Department of Education is not adequately meeting regulatory requirements to deliver these aid programs,” higher education expert Mark Kantrowitz told CNBC in September.
Time is ticking for borrowers to avoid tax bills
Many backlogged borrowers may be due for loan forgiveness, but those borrowers could face a large tax bill if the loan cancellation occurs after December, the AFT said in its lawsuit.
American Rescue Plan Act of 2021 student loan forgiveness Federally tax-exempt until the end of 2025. But Trump’s “big beautiful bill” did not expand or make permanent this broader provision.
The tax bill for student loan forgiveness can be significant.
The average loan balance for borrowers enrolled in an IDR plan is around $57,000, Kantrowitz said.
Kantrowitz estimates that forgiving that amount for those in the 22% tax bracket would trigger a tax burden of more than $12,000. Low-income earners or those in the 12% tax bracket would still owe around $7,000.
The difficulty of accessing student loan relief programs comes at a challenging time for borrowers.
More than 5 million people are in default on their federal student loans, and more than 4 million are “end-stage delinquent,” or 181 to 270 days behind on their payments, according to an analysis last month. Congressional Research Service.
“The shutdown’s impact on student loans is another blow to college graduates who are burdened with large student debt and need access to affordable monthly payment plans,” said AFT President Randi Weingarten. “Every day of delay means more stress, more uncertainty and more people slipping through the cracks.”
