Major Federal Student Loan Changes Coming Soon: What Borrowers Need to Know About Repayment and Forgiveness

‎The federal student loan landscape has already seen notable shifts over the past year, but even more substantial changes are imminent. Within the next few weeks, borrowers will begin to feel the impact of a new round of reforms that will reshape repayment options and forgiveness rules.

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‎Big updates to federal student loan repayment and forgiveness are approaching, including IBR expansion, plan phaseouts, and the return of taxable IDR forgiveness starting in 2026.

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‎Much of the recent disruption within the federal student loan system stems from a mix of court rulings, legal disputes, and legislative action. While lawsuits have halted certain initiatives like the SAVE plan, other relief pathways—such as student loan forgiveness under IBR, ICR, and PAYE—have remained in place. At the same time, the Department of Education is moving ahead with provisions tied to the One Big, Beautiful Bill Act (OBBBA), which was passed last summer by congressional Republicans and signed into law by President Donald Trump.

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‎Below is an overview of the key changes borrowers should prepare for as new student loan repayment and forgiveness rules approach.

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‎Income-Based Repayment Expansion Expected by Late December

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‎One of the earliest updates required by the OBBBA is the expansion of the Income-Based Repayment (IBR) plan to accommodate higher-income borrowers. Under the law, the Department of Education will eventually eliminate the ICR, PAYE, and SAVE plans no later than July 2028, while keeping IBR in place. A new income-driven option, known as the Repayment Assistance Plan (RAP), is also scheduled to launch sometime next year. Once these changes are fully implemented, IBR and RAP will be the only income-linked repayment plans available.

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‎To protect borrowers who are working toward forgiveness under plans slated for phaseout, the OBBBA requires the removal of the “partial financial hardship” condition previously tied to IBR enrollment. This requirement had blocked borrowers with higher incomes, relative to their loan balances, from accessing IBR. Eliminating it opens the door for these individuals to enroll and continue making progress toward forgiveness.

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‎However, the Education Department did not initially update its application systems to reflect this change. As a result, some borrowers seeking IBR were denied due to the outdated hardship rule. This issue later became part of a broader lawsuit filed by the American Federation of Teachers against the department and Education Secretary Linda McMahon earlier this fall.

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‎As part of a settlement agreement, the Education Department confirmed it would update its systems to formally remove the partial financial hardship requirement. According to revised guidance on the department’s website, these updates are expected to be completed by the end of December. Until then, borrowers who were denied IBR for this reason are encouraged to reapply; their applications will be held until processing resumes.

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‎Income-Driven Repayment Forgiveness Becomes Taxable Again in 2026

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‎The OBBBA did not extend existing tax relief related to income-driven repayment (IDR) loan forgiveness. As a result, any forgiveness granted after 20 or 25 years under IBR, ICR, or PAYE will once again be considered taxable starting January 1, 2026.

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‎In general, forgiven or cancelled debt is treated as taxable income. When loans are discharged, lenders typically issue IRS Form 1099-C, requiring borrowers to report the forgiven amount as income. This can lead to a significant tax bill, especially for large balances.

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‎Historically, forgiveness under IDR plans has been taxable. However, the American Rescue Plan Act of 2021 temporarily exempted all federal student loan discharges from federal taxation through the end of 2025. Because the OBBBA does not continue this exemption, IDR forgiveness will revert to being taxable beginning in January. Other programs—such as Public Service Loan Forgiveness and Total and Permanent Disability Discharge—will continue to remain tax-free at the federal level.

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‎As part of its agreement with the American Federation of Teachers to resolve legal disputes over IDR processing and forgiveness, the Education Department also committed to not issuing Form 1099-C to borrowers who reach their IDR forgiveness milestone by the end of 2025, even if the official discharge occurs in 2026. The agreement also advises borrowers currently in the SAVE plan who already qualify for forgiveness to switch into another eligible income-driven plan—IBR, ICR, or PAYE—by December 31, 2025, in order to preserve the existing tax exemption.