Warning to student loan borrowers as Trump announces plans to cancel debt for millions

Millions of people are now eligible for student loan forgiveness in America, but there’s a catch.

After the American Federation of Teachers (AFT) sued the White House because the Department of Education had ceased processing applications for affordable repayment programs for student loans, things took a turn.

The AFT has been in talks with the Department of Education, and on October 17, reached an agreement that student loan forgiveness will be issued to selected applicants.

The Trump administration said that, as part of the Income-Contingent Repayment (ICR) and Pay as You Earn (PAYE) plans, student loan forgiveness will benefit more than 2.5 million, according to CNBC.

Those who think they might be eligible can check the Federal Student Aid website, but if they don’t want to receive a tax bill for their discharged loans, they’ll need to act fast.

Millions of students could see their student debt disappear (MementoJpeg/ Getty Stock)

The website explains: "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 shared that borrowers who become eligible for loan forgiveness in 2025 will not owe federal taxes on the amounts, provided they are not on a Saving on a Valuable Education repayment plan.

The SAVE plan is currently blocked by federal courts and will be eradicated by Trump’s ‘big beautiful bill.’

So, to make sure you’re able to have your forgiven funds remain tax-free, switch to an ICR, PAYE or IBC program before the end of the year to be eligible.

If you find that you’ve been rejected for the IBR plan because you lack evidence to show you are suffering financial hardship, the Department of Education advises you to reapply.

The administration shared people may not pay federal tax on their forgiven loans (Westend61/ Getty Stock)

At this time, the department is still working through a backlog of over 1 million IDR applications, according to CNBC News. However, with the recent government shutdown, it is unknown whether it will affect application processes.

“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,” the agreement states.

While they won’t be charged federal income taxes, borrowers could be liable to pay state income taxes on forgiven loans, depending on the state they live in.

So, checking your individual circumstances against the Federal Student Aid website is key to making sure you understand what you may or may not be liable to pay to the government.