New PSLF Rule to Disqualify Employers from Student Loan Forgiveness Eligibility Faces Legal Test

A proposed new rule that would give the Education Department the power to cut off employers from being eligible for student loan forgiveness under the PSLF program is facing multiple legal challenges.And those challenges are about to come to a head.Public Service Loan Forgiveness (PSLF) offers borrowers a path to eliminating their federal student loan debt after making the equivalent of 10 years of “qualifying payments,” which are payments made on Direct federal student loans under certain repayment plans (primarily income-driven repayment, or IDR, plans) while working full-time in qualifying nonprofit or government jobs.Generally, 501(c)(3) nonprofit organizations and most domestic government or public entities are eligible employers for the PSLF program under the original PSLF statute that Congress enacted nearly 20 years ago.

But The Trump administration published new regulations last year that, if implemented, would allow the Secretary of Education to unilaterally determine that an otherwise-qualifying PSLF employer should no longer be eligible.The new rules, which are set to go into effect this July, cut effectively cut off student loan forgiveness for borrowers who work for organizations that receive an adverse determination.The new PSLF restrictions are currently facing multiple legal challenges brought by nonprofit organizations and Democratic-led state and city governments.Those challenges could be decided within the next few months, and the outcomes could be decisive in whether certain borrowers will ultimately receive student loan forgiveness.

Here’s the latest.Education Department Rule Could Disqualify Employers from Student Loan Forgiveness Under PSLF The Education Department’s proposed PSLF rule would allow the Secretary of Education to disqualify employers from participating in PSLF if they engage in activities that have a “substantial illegal purpose.” The rule defines “substantial illegal purpose” to mean specific forms of activities including “aiding or abetting” the violation of federal immigration laws, providing certain gender affirming healthcare services to transgender youth, engaging in what the department characterizes as “illegal discrimination,” or facilitating “violence for the purpose of obstructing or influencing Federal Government policy.” The Trump administration has argued that the new rules are necessary to ensure that student loan forgiveness and other benefits associated with the PSLF program are going to organizations engaged in lawful activities.“The proposed regulations would prevent taxpayer-funded PSLF benefits from being improperly provided to individuals who are employed by organizations that engage in activities that have a substantial illegal purpose,” explained the Education Department in a summary accompanying the publication of the rules in the Federal Register last year.“These proposed changes are intended to improve the administration of the PSLF program and provide protection for taxpayers.” Under the rules, the Education Department could, after an investigation and a determination process, decide that a nonprofit or government entity that would otherwise qualify for PSLF is engaging in activities that have a substantial illegal purpose.

That could effectively result in the organization being disqualified from PSLF.That, in turn, would prevent any employees working for that organization from continuing to qualify for student loan forgiveness under the PSLF program, even if their individual actions had nothing to do with the “illegal” activities in question.Borrowers would not lose their existing PSLF credit that they already earned prior to the adverse determination, but they would have no recourse to challenge the department’s determination.Instead, they would have to seek new employment with a different qualifying organization if they wanted to continue pursuing student loan forgiveness under PSLF.

Rule To Disqualify Employers from Student Loan Forgiveness Under PSLF Faces Legal Challenges Critics of the Trump administration’s new PSLF rule argue that if implemented, the Education Department would be able to disqualify employers for engaging in actions that are perfectly lawful but are simply contrary to the Trump administration’s policy preferences.For example, The Institute For College Access and Success (TICAS) argued in an analysis last year that the department could disqualify entire Democratic-led city and state governments for being on a Department of Homeland Security “sanctuary jurisdiction” list because, in the administration’s opinion, they are not sufficiently cooperating with federal immigration enforcement activities, even if no court has found that the state or municipality has engaged in unlawful conduct.But TICAS suggests that hundreds of thousands of public employees (including teachers, police officers, firefighters, and civil servants, and public health workers) could be cut off from student loan forgiveness if their employer is deemed ineligible for PSLF.TICAS argued that there could be similar consequences for academic institutions, many of which have also been in the administration’s crosshairs.

The Education Department is now facing several legal challenges brought by nonprofit organizations and a coalition of state and local governments, who argue that the rule to restrict student loan forgiveness under PSLF is unlawful.The groups contend that the statute Congress passed in 2007 creating the PSLF program does not provide sweeping authority to disqualify employers based in disfavored activities, and that targeting organizations based on their mission or actions could violate constitutional guarantees of free speech and association.In three separate legal challenges, the groups have filed motions for summary judgment, asking the courts to block or vacate the PSLF rule on a nationwide basis.The Education Department has opposed these motions, maintaining that the effort to limit student loan forgiveness to organizations it deems are engaged in “lawful” activities is perfectly legal, and arguing that the legal challenges should be dismissed altogether.

Last week, the Plaintiffs in one of the challenges filed a reply to the department’s opposition motion.“The Rule is manifestly contrary to the statutory text, which unambiguously provides that all fulltime jobs at a 501(c)(3) organization qualify for PSLF, leaving no room for the Secretary to exclude those employers for any reason,” wrote the Robert F.Kennedy Center for Justice and Human Rights in its reply brief last week.“If Plaintiffs follow the law, Defendants argue, they have nothing to fear from the Rule and so suffer no injury giving rise to standing.

Defendants assert that the Rule cannot violate Plaintiffs’ constitutional due process and free speech rights if Plaintiffs do not challenge the underlying state and federal laws referenced in the Rule.These arguments are irreconcilable with the text of the Rule.The Rule grants the Secretary unfettered discretion to bring enforcement actions for conduct that the Secretary, in her absolute discretion, deems ‘illegal,’ even if no court has ever held such conduct to violate the law, and its list of ‘illegal activities’ is inexplicable except as a reflection of political animus.” What Come Next for PSLF Rule Limiting Student Loan Forgiveness The proposed rule changes for PSLF that would restrict student loan forgiveness are not yet in effect, and are not expected to go live until this July.“The U.S.

Department of Education published its final PSLF program regulations that will be effective on July 1, 2026,” says the department in a banner message on its main PSLF website landing page.“The program is not changing today, and borrowers do not need to take any action.” For now, borrowers can’t do much except to wait as the legal process plays out.The courts handling the legal challenges over the new PSLF rule are expected to hold hearings on the summary judgment motions in the coming weeks.The challengers are hoping for a favorable ruling before July, which could allow the restrictions on student loan forgiveness to be blocked before they even take effect.

But time will tell.