A major national labor union filed a class action lawsuit against the Trump administration on Tuesday, alleging that the Department of Education and Secretary of Education Linda McMahon are unlawfully blocking student loan forgiveness for hundreds of thousands of borrowers across multiple programs, including several income-driven repayment plans and Public Service Loan Forgiveness, or PSLF.
The lawsuit, filed by the American Federation of Teachers, marks a major escalation of an existing legal challenge that the group filed against the department earlier this year over stalled applications for IDR and PSLF. The AFT filed an amended complaint on Tuesday, expanding the challenge to encompass several new allegations of illegally blocked student loan forgiveness and seeking class action status for impacted borrowers.
“Borrowers are and have been unable to access affordable monthly payment plans, some borrowers are being and have been thrust into default on their debt, and some borrowers are being denied their right to have their loans cancelled through IDR or PSLF,” said the AFT in its amended complaint. “For those borrowers who have satisfied the statutory requirements to have their debts cancelled but whose loans the Department has not cancelled, they are trapped in a debt that legally they should no longer owe. This debt continues to appear on credit reports restricting borrowers’ ability to access credit to purchase homes, cars, and other necessities, and with looming tax consequences if action is not taken swiftly. These borrowers must also make payments on a debt that should no longer exist for fear of becoming delinquent, or agree to be placed in a forbearance with no clear end date.”
Here’s what the latest developments mean for borrowers and student loan forgiveness programs, and what to expect in the coming months as the litigation process plays out.
Original Lawsuit Focused On Application Backlogs For Student Loan Forgiveness And Repayment
In its original lawsuit filed against the Trump administration in March, the AFT accused the Department of Education of creating a massive backlog of IDR and PSLF applications by unlawfully shutting down the entire IDR system in response to legal challenges over the SAVE plan, the newest of several income-driven repayment plans that offer borrowers affordable student loan payments tied to their income. IDR plans also are supposed to lead to eventual student loan forgiveness after 20 or 25 years in repayment. Enrollment in IDR plans is also typically a precondition for borrowers pursuing PSLF, as well.
The Trump administration responded that a temporary shutdown of the IDR application system was necessitated by a ruling in the separate SAVE plan legal challenge that blocked SAVE and regulations governing several other IDR plans. The department argued that the IDR application was quickly updated and restored, and processing has since resumed.
But court filings show that the department has not made much progress in getting through the IDR application backlog. The AFT agreed to pause its lawsuit in April to allow the department to demonstrate that it was working through the backlog successfully. While subsequent filings indicate that the department and its contracted student loan servicers have indeed processed hundreds of thousands of IDR applications, the backlog still stands at approximately 1.3 million applications. Furthermore, the backlog for the PSLF Buyback program, which allows borrowers to make a lump sum payment covering certain periods of deferment and forbearance so that they can qualify for student loan forgiveness, has increased by nearly 50% during the last several months, despite several thousand applications that were processed.
In the meantime, new problems have arisen with both IDR and PSLF. The Department of Education quietly announced earlier this summer that it had suspended student loan forgiveness under the IBR program, despite the fact that IBR is not subject to any legal challenge or injunction. And borrowers are also contending with errors and undercounts of qualifying PSLF payments, even for those who are not directly impacted by the SAVE plan legal challenges.
New Class Action Complaint Raises New Student Loan Forgiveness Issues
The AFT’s amended complaint filed on Tuesday does two things. First, the updated lawsuit now seeks class action status for the challengers, likely in response to a Supreme Court ruling earlier this year that narrowed the circumstances in which parties can request a nationwide injunction. Class action lawsuits remain one avenue to obtain a national court order blocking or requiring certain actions, following the Supreme Court’s controversial decision.
Second, the amended lawsuit expands the allegations to encompass several additional issues beyond the application backlogs associated with IDR plans and PSLF Buyback (although the updated complaint notes that these backlogs remain significant and, at the current processing rate, will remain so for possibly months or even years, despite the department’s efforts). The complaint now outlines several other allegedly unlawful actions the Trump administration is taking that block student loan forgiveness including issuing mass denials of IDR applications, suspending student loan forgiveness under IBR, and preventing borrowers from receiving credit for PSLF.
“According to reports, an estimated 460,000 borrowers will have their application rejected and will have to apply for IDR again and select a specific plan,” reads the updated complaint. “Although this will likely result in a significant decrease in the number of pending IDR applications, it does not reflect the true processing rate demonstrated by the monthly status reports.”
“In addition to depriving borrowers of their right to affordable payment options under IDR by delaying the processing of their applications, the Department is withholding loan cancellation from borrowers who qualify to have their loans cancelled under the HEA,” continues the amended complaint. “Although a preliminary injunction in the SAVE litigation prohibits the Department from providing IDR cancellation pursuant to the SAVE plan, nothing is preventing the Department from cancelling eligible borrowers’ debts through the IBR, ICR, or PAYE plans.”
The complaint cites several examples of specific borrowers who reached the 20- or 25-year threshold for student loan forgiveness under these plans, in some cases many months ago, but have yet to receive a discharge of their loans, including for IBR, which the AFT argues even the department “concedes is required by law.” The AFT also contends that the department is illegally blocking student loan forgiveness under PSLF, as well, by failing to process paperwork to update qualifying PSLF payment counts.
“The Department is similarly withholding loan cancellation for borrowers who have accrued at least 120 qualifying payments under the PSLF program necessary for loan cancellation, or who have pending Buyback applications that, once reviewed and granted, would result in at least 120 qualifying payments,” reads the amended complaint. “For borrowers who continue to make qualifying payments and have qualifying employment, the Department is not processing their PSLF paperwork to reflect the correct number of qualifying months they have accrued toward the 120 months required for PSLF. For borrowers who have met or exceed the necessary 120 months, the Department is withholding their statutory right to have their loans cancelled.”
The Trump administration has not issued a formal response to the new allegations in the AFT’s amended complaint. But department officials have previously argued that any pause on lawful student loan forgiveness programs is temporary while the department works to update its internal systems in response to recent court orders related to the SAVE plan legal challenges.
Student Loan Forgiveness Tax Consequences Loom For Borrowers Denied Relief
The AFT pointed out that since congressional Republicans did not extend student loan forgiveness tax relief that is set to expire at the end of the year, the processing delays could result in thousands of borrowers being hit with massive tax bills for 2026. This may happen to borrowers even if they qualified for student loan forgiveness during 2025, which should have protected from the so-called student loan forgiveness “tax bomb.”
“For borrowers who have met their statutory requirements to have their debts cancelled pursuant to IDR but whose cancellation the Department is withholding also face a form of fiscal cliff: pursuant to the American Recovery Plan Act, for loans not cancelled on or before December 31, 2025, the cancelled amount will be considered taxable income for federal income tax purposes,” said the AFT in its class action complaint. “If the Department does not process their cancellations before this deadline, these borrowers will literally pay for the government’s inaction.”
Student loan forgiveness will remain tax-free under federal law for the PSLF program, but IDR loan forgiveness reverts to being taxable again on January 1, 2026 following passage of the “One, Big, Beautiful Act” in July.
What Comes Next For Student Loan Forgiveness Dispute
In conjunction with the filing of the amended complaint, the AFT filed a joint scheduling motion setting out deadlines for next steps in the litigation. The AFT is expected to file a motion for a preliminary injunction, likely requesting immediate nationwide relief for all covered IDR and PSLF borrowers impacted by the student loan forgiveness backlogs and delays, by next week. The Trump administration would then have until October 10 to file a response. The court will then schedule a formal hearing, likely for later in the fall, before issuing a ruling.