Navigating student loan forgiveness is tougher than ever for borrowers, as Congress and the Education Department implement sweeping changes to repayment and discharge programs. But one subset of borrowers with student loans enrolled in the SAVE plan, and who qualify for relief now, must act within the next two weeks or they could face substantial financial penalties.
The SAVE plan, created under the Biden-Harris administration, offered borrowers reduced payments tied to their income. Like all income-driven repayment plans, the program offered borrowers student loan forgiveness after 20 or 25 years in repayment. But loan forgiveness under SAVE has been blocked since last year after a group of GOP-led states filed a lawsuit challenging the program. Last week, the Education Department entered into a settlement agreement that will effectively end the SAVE plan, likely in the coming months. But under a separate settlement agreement to resolve a different legal challenge against the department, borrowers who have already reached the threshold for student loan forgiveness under SAVE will need to apply to switch to a different income-driven repayment plan by the end of December to be shielded from tax liability associated with IDR discharges.
Here’s a breakdown of what’s happening, and what student loan borrowers should know.
Multiple Changes To Student Loan Forgiveness Complicate Pathways To Relief
The current dilemma facing some borrowers with federal student loans enrolled in the SAVE plan is tied to three separate, but related, developments.
First, student loan forgiveness under the SAVE plan has remained suspended, and is not returning. A federal appeals court issued an injunction last year that blocked the program while a Republican-led legal challenge proceeded, throwing more than seven million borrowers into an involuntary administrative forbearance. Last week, the Education Department entered into formal settlement agreement with the states that brought the challenge. Pending court approval, the agreement prohibits any further student loan forgiveness under the SAVE plan, and will force borrowers into other repayment plans in the coming months.
Second, student loan forgiveness under all IDR plans reverts to being treated as a taxable event again under federal law starting in 2026. Historically, IDR loan forgiveness would result in borrowers being issued an IRS Form 1099-C, requiring them to report their discharged balance as “income” for tax purposes, resulting in potentially significant tax liability. The American Rescue Plan Act of 2021 exempted IDR loan forgiveness from federal taxation through 2025, but congressional Republicans declined to extend this tax relief in the One Big, Beautiful Bill Act that Congress passed (and President Trump signed) in July. That means that IDR discharges will result in the issuance of Form 1099-C’s again starting in January, leading to potentially severe tax consequences for borrowers who get loan forgiveness under IDR plans starting next year (student loan forgiveness under certain other programs, like PSLF, remains tax free federally).
And finally, the Education Department promised to resume processing student loan forgiveness under other IDR plans (specifically the ICR, IBR, and PAYE plans) in October in a settlement agreement with the American Federation of Teachers, or AFT, to resolve allegations of unlawful denials or suspensions of IDR processing. As part of that agreement, the department agreed that borrowers who reach the 20- or 25-year eligibility threshold for IDR student loan forgiveness before the end of 2025 may be shielded from tax liability under certain circumstances, even if their discharge is delayed until 2026.
Some SAVE Plan Borrowers Must Act Now To Avoid Student Loan Forgiveness Tax Penalty
The Education Department’s agreement with the AFT spells out specific requirements for borrowers with student loans enrolled in the SAVE plan who qualify for a discharge.
“The defendants shall not file an Internal Revenue Service (’IRS’) Form 1099-C for borrowers who becomes eligible for the discharge of their loans in 2025 if the conditions in IRS Notice 2022-1 are satisfied,” reads the agreement. However, this only applies to the ICR, IBR, and PAYE plans.
“For their internal purposes, the defendants shall use only the date a borrower becomes eligible to have their loans cancelled under the IBR, Original ICR, or PAYE plans as the effective date of discharge of their loans,” continues the agreement.
Borrowers in the SAVE plan forbearance whose student loans have reached eligibility for student loans forgiveness have one pathway to try to avoid federal tax consequences. They must apply to switch to either ICR, IBR, or PAYE before the end of December.
“For the defendant’s internal purposes, when a borrower (1) has achieved eligibility under the Saving on a Valuable Education (’SAVE’) plan, (2) applies to transfer to one of the IBR, Original ICR, or PAYE plans on or before December 31, 2025, and (3) that application is approved on or after January 1, 2026—the date that borrower becomes eligible for cancellation under the new plan constitutes the effective date of their loan discharge, even if that date falls on or before the date the borrower’s application was approved,” says the agreement.
This essentially means that a borrower who has reached eligibility for student loan forgiveness under the SAVE plan, but can’t get a discharge because of last year’s court injunction and this month’s settlement, must apply to switch to one of the other IDR plans by December 31, 2025. Payments that count toward student loan forgiveness under SAVE should also count under the other IDR plans, provided the borrower does not consolidate their student loans. If they apply to switch from SAVE to one of the other IDR plans before the end of December, then they may be able to avoid being issued an IRS Form 1099-C, even if they aren’t switched to the other plan or approved for a discharge until sometime later in 2026, as long as their loan forgiveness eligibility date was during 2025 (or earlier).
What Other SAVE Plan Borrowers Should Know About Student Loan Forgiveness
Importantly, the above requirement only applies to borrowers with student loans in the SAVE plan who qualify for student loan forgiveness now. Borrowers who don’t qualify for a discharge yet because they have not reached their 20- or 25-year eligibility threshold don’t necessarily need to take immediate action.
However, even SAVE plan borrowers who don’t qualify for a discharge now may want to start exploring their options. The SAVE plan forbearance period does not count toward student loan forgiveness, either for IDR plans broadly or for Public Service Loan Forgiveness (or PSLF). Furthermore, the Education Department resumed charging interest on student loans in the SAVE plan in August, leading to ongoing balance growth. And finally, given the department’s recent settlement agreement to formally end SAVE, these borrowers will likely be required to switch to a different (and possibly more expensive) repayment plan sometime sometime during 2026, and possibly in as little as just a few months. It may be prudent for these borrowers to start evaluating their alternative repayment options sooner rather than later, given ongoing IDR application backlogs and processing delays.
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