Workers walk through the crypt of the US Capitol in Washington, DC, US, on Wednesday, Oct. 8, 2025.
Valerie Plesch | Bloomberg | Getty Images
With a union lawsuit against the Trump administration on hold during the government shutdown, borrowers’ wait times for student loan forgiveness may get even longer.
The American Federation of Teachers’ legal challenge against Trump officials will be stayed until Congress restores appropriations to the U.S. Department of Justice, U.S. District Judge Reggie Walton said in an Oct. 4 filing. The government shuttered on Oct. 1 after Democrats and Republicans failed to agree on a spending deal.
In its lawsuit, the AFT accused the U.S. Department of Education of denying federal student loan borrowers their rights to an affordable repayment plan and to the debt forgiveness opportunities mandated in their loan terms.
The stay on the union’s legal challenge could further prolong the long wait times borrowers are already facing, consumer advocates say. What’s more, a law shielding student loan forgiveness from taxation expires at the end of 2025, meaning borrowers who get the relief after that point may be hit with a bill from the IRS.
“We are very concerned that, without judicial intervention, borrowers will not get their cancellation processed this tax year and could potentially incur thousands of dollars of tax liability,” said Persis Yu, deputy executive director and managing counsel at Protect Borrowers, which is serving as AFT’s counsel.
The Education Department requested the stay earlier this month, in part because its Justice Department attorneys are prohibited from working during the government shutdown. The plaintiffs did not oppose the request.
“However, if the shutdown does not resolve before Friday, we reserved the right to request that [the] briefing resume,” Yu said.
The Education Department did not respond to a request for comment on the loan forgiveness actions. A CNBC reporter’s email to a spokesperson at the agency was met with an automated message, saying, “I will respond to emails once government functions resume.”
Here’s what borrowers need to know about the paused lawsuit.
Lawsuit focuses on borrower backlog
The AFT, a union with some 1.8 million members, filed its lawsuit against the Trump administration in March, accusing officials of blocking borrowers from student loan repayment plans mandated by Congress, as well as a popular loan forgiveness program for government and nonprofit workers. In September, the union amended its complaint to seek class action status.
“Borrowers are unable to access affordable monthly payment plans, some borrowers are being thrust into default on their debt, and some public service workers are being denied their statutory right to lower their monthly payment and earn credit towards Public Service Loan Forgiveness,” the lawsuit said.
As of the end of August, the Education Department had a backlog of 1,076,266 income-driven repayment plan applications, September court records show. That means more than a million people are waiting to get into a new income-driven repayment plan. Those plans cap a borrower’s monthly bill at a share of their income and lead to debt cancellation after a certain period.
Meanwhile, there are more than 74,000 pending applications from borrowers hoping to qualify for the Public Service Loan Forgiveness Buyback program. PSLF offers debt forgiveness to certain public servants after a decade.
“The backlog provides evidence that the U.S. Department of Education is not adequately fulfilling the statutory requirements” to offer those relief programs, higher education expert Mark Kantrowitz told CNBC in September.
Clock is ticking for borrowers to avoid tax bill
AFT said in its lawsuit that many of the borrowers in the backlog may already be due for loan forgiveness, but that if the loan discharges occur after December, those borrowers could face a huge tax bill.
The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025. But Trump’s “big beautiful bill” did not extend or make permanent that broader provision.
The tax bill on student loan forgiveness can be substantial.
The average loan balance for borrowers enrolled in an IDR plan is around $57,000, said higher education expert Mark Kantrowitz.
For those in the 22% tax bracket, having that amount forgiven would trigger a tax burden of more than $12,000, Kantrowitz estimates. Lower earners, or those in the 12% tax bracket, would still owe around $7,000.
The difficulty 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 another over 4 million are in “late-stage delinquency,” or between 181 and 270 days late on their payments, according to an analysis last month by the Congressional Research Service.
“The effect of the shutdown on student loans is just another blow to college graduates with huge student debt burdens who need access to affordable monthly payment plans,” said AFT President Randi Weingarten. “Each day of delay means more stress, more uncertainty, and more people slipping through the cracks.”