A new rule from the Department of Education could reshape the Public Service Loan Forgiveness program (PSLF) by redefining which employers qualify.

The new rule, published today in the Federal Register (PDF File), would allow the Secretary of Education to block PSLF eligibility for organizations determined to have a “substantial illegal purpose.” The definition covers a wide range of activities, from providing medical care to transgender minors to allegedly violating immigration laws or engaging in (or even prohibiting to stop) certain protests.

The rule, slated to take effect July 1, 2026, would not strip existing PSLF participants of past qualifying payments. However, future payments would stop counting if an employer is disqualified under the new criteria.

What Is The Criteria For Disqualification 

Under the proposal, all 501(c)(3) nonprofits are typically eligible PSLF employers under federal law. The new language adds an additional standard, empowering the Secretary to disqualify an employer based on the preponderance of the evidence (ranging from court rulings to administrative findings) that it engages in a “substantial illegal purpose.”

The term “substantial illegal purpose” is defined to include:

• Aiding or abetting violations of Federal immigration laws
• Supporting terrorism, including by facilitating funding to, or the operations of, cartels designated as Foreign Terrorist Organizations, or by engaging in violence for the purpose of obstructing or influencing Federal Government policy
• Engaging in the chemical and surgical castration or mutilation of children in violation of Federal or State law
• Engaging in the trafficking of children to states for purposes of emancipation from their lawful parents in violation of Federal or State law
• Engaging in a pattern of aiding and abetting illegal discrimination
• Engaging in a pattern of violating State laws as defined in paragraph (34) of this subsection.

Violations of state law are focused on protests, and include a final, non-default judgment by a State court of:

• Trespassing
• Disorderly Conduct
• Public Nuisance
• Vandalism
• Obstruction of Highways.

Employers would receive notice and an opportunity to respond, but the process for challenging a determination remains undefined. Borrowers impacted by the change of an employer’s status would have no appeal rights if their employer is disqualified.

Concerns Over Scope

One of the big concerns of the rule is scope. Even the final rule acknowledges “Employer qualification will be linked to the EIN used for reporting to the IRS so employees in one area or agency may be affected by the activities of employees in other organizations under the same EIN.“

They give the example of the County of Los Angeles, which “…has a single EIN covering various departments including the Los Angeles County Public Defender, Los Angeles County Department of Children and Family Services, Harbor-UCLA Medical Center, and the County of Los Angeles Fire Department.”

The concern is that if one group or agency is found to be disqualified under the new rules, all employees across the entire covered EIN would be disqualified – even if they have no connection to the disqualifying issue. In the Los Angeles example, finding that the UCLA medical center provides gender affirming care could disqualify a firefighter that has no connection to that issue.

Furthermore, the rule appears contrary to the existing rules that all 501(c)(3) organizations are eligible for PSLF unless their nonprofit status is revoked through existing IRS processes. The existing law clearly says “An organization under section 501(c)(3) of the Internal Revenue Code of 1986 that is exempt from taxation under section 501(a) of the Internal Revenue Code;“.

As such, it’s likely going to be subject to legal challenges for both exceeding the scope of the rulemaking process and for other potential violations of civil rights and higher education laws.

What Comes Next For Borrowers And Employers

The proposed rule is not yet in effect. The Department of Education will take public comments for 30 days starting Monday, August 18, 2025. After it reviews the comments, the Department of Education will likely release the final rule by October 31, 2025, so that it can take effect on July 1, 2026 as planned. That’s also assuming that it doesn’t get blocked by legal challenges along the way.

Borrowers working for potentially affected employers are encouraged to:

With more than one million borrowers benefiting from PSLF to date, the PSLF program is working. But these changes work to serve as a chilling effect for certain employers and groups that may or may not align with a political party’s interests.

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