U.S. — More than 170,000 additional borrowers will have their student loans forgiven following a federal appeals court decision in late July 2026 regarding the Sweet v. McMahon settlement. A federal appeals court rejected the Department of Education's attempt to delay a decision deadline for Sweet Post-Class applicants in a July 23, 2026, memorandum.

The ruling enforces the timeline for a subset of borrowers defined as those who submitted borrower defense to repayment applications between June 23 and November 15, 2022. The Sweet v. McMahon settlement amount totals $23 billion.

Circuit judges Kim McLane Wardlaw, John B. Owens, and Daniel A. Bress stated in a memorandum that the Department of Education knew there were approximately 179,000 Post-Class applicants when it jointly moved with plaintiffs for final approval of the settlement in September 2022. The settlement class is defined as all individuals who had a borrower defense application pending as of June 22, 2022.

Post-Class applicants will receive full settlement relief by June 15, 2027, according to the Project on Predatory Student Lending. The legal dispute originated when seven plaintiffs filed a complaint on June 25, 2019, in the United States District Court for the Northern District of California on behalf of themselves and all federal student loan borrowers. The court granted final approval of the Sweet v. McMahon settlement in 2022.

In many cases, forgiven debt is considered taxable income unless the borrower qualifies for an IRS exception. This development occurs against a backdrop of widespread delinquency in the federal student loan portfolio. Out of $1.7 trillion in federally backed student loans nationwide, $233.3 billion is in default, according to Office of Federal Student Aid data.

Roughly 9.5 million Americans, or 1 in 5 federal student loan borrowers, are more than nine months behind on their payments. The average federal student loan borrower owes roughly $40,000, according to research firm Education Data Initiative. Approximately 9.5 million federal student loan borrowers are currently in default, according to data from the Office of Federal Student Aid.

Regional data illustrates the scale of delinquency. Since the pandemic pause ended, the number of borrowers in Indiana who are more than 360 days delinquent has grown by 90,000, bringing the total to 212,000, or 24% of residents with loans. Out of the schools in the top quarter for nonpayment rates, 76% were for-profit schools, according to Office of Federal Student Aid data.

The 1% autopay interest rate discount is scheduled to remain in effect until June 30, 2028. Enrolling in the automatic payment feature for student loans is free of charge. Currently, only about 40% of student loan borrowers are registered for automatic repayments. The Education Department aims to double the rate of borrowers registered for automatic repayments to roughly 80%.

"This interest rate reduction will help borrowers as they consider new, affordable repayment plans and work to repay their loans on time," Under Secretary of Education Nicholas Kent said in a statement when the enhanced discount was adopted last month. "We expect this temporary incentive to drive up repayment rates and significantly improve the overall health of the federal student loan portfolio," Kent said in a statement.

Borrowers navigating these changes may also interact with the Public Service Loan Forgiveness program. The Public Service Loan Forgiveness program allows borrowers to have the remaining balance on eligible federal Direct Loans forgiven after making 120 qualifying monthly payments while working full-time for a qualifying public service employer. Qualifying public service employers include federal, state, local or tribal government agencies, public schools and colleges, eligible 501(c)(3) nonprofit organizations, and certain other nonprofit organizations that provide qualifying public services.

Public Service Loan Forgiveness is generally limited to federal Direct Loans, requiring borrowers with Federal Family Education Loan (FFEL) Program loans or Perkins Loans to consolidate them into a Direct Consolidation Loan for payments to count. Consolidating loans into a Direct Consolidation Loan does not automatically preserve previous payment history toward Public Service Loan Forgiveness. Borrowers can use the Department of Education's PSLF Help Tool to verify whether their employer qualifies for the Public Service Loan Forgiveness program.

Submitting employment certification periodically allows the Department of Education to update borrowers' qualifying payment counts for Public Service Loan Forgiveness. Borrowers who took out federal loans on or after July 1, 2026, must generally use the new Repayment Assistance Plan (RAP) for their payments to count toward Public Service Loan Forgiveness. New rules addressing organizations found to have a "substantial illegal purpose" took effect last month, though portions of these changes are facing legal challenges in federal court.

Why It Matters

The court-ordered relief for over 170,000 borrowers addresses a specific subset of claims while $233.3 billion in federal student loans remains in default nationwide. With roughly 9.5 million borrowers more than nine months behind on payments, the settlement impacts a portfolio where one in five borrowers faces delinquency. Forgiven amounts may count as taxable income unless an IRS exception applies, affecting the net financial benefit for recipients.