U.S. Department of Education Narrows Scope of the Public Service Loan Forgiveness Program

At a Glance

• On October 31, 2025, the U.S. Department of Education (the Department) published a final rule amending the Public Service Loan Forgiveness (PSLF) program. The final rule takes effect on July 1, 2026, and revises the definition of eligible employers to exclude those engaged in activities deemed by the Department to be “indicative of a substantial illegal purpose.”
• The final rule is substantially similar to the proposed rule released in August 2025, which followed President Trump’s March 2025 Executive Order (EO) regarding Public Service Loan Forgiveness.
• On November 3, 2025, two lawsuits were filed by a group of state attorneys general and a coalition of major U.S. cities, labor unions and nonprofit organizations, respectively, challenging the rule on statutory and constitutional grounds.

On October 31, 2025, the U.S. Department of Education (the Department) published a final rule amending the Public Service Loan Forgiveness (PSLF) program. The final rule takes effect July 1, 2026, and amends the definition of eligible employers to exclude those engaged in activities deemed by the Department to be “indicative of a substantial illegal purpose.” Under the final rule, activities “indicative of a substantial illegal purpose” include, among others, those related to immigration, health services for transgender youth and “engaging in a pattern of aiding and abetting illegal discrimination.”

Enacted in 2007, the PSLF program provides loan forgiveness to federal student loan borrowers who work for a significant period of time in either governmental or certain eligible nonprofit organizations. To qualify, a borrower must make 120 qualifying loan payments while employed at a qualified employer. The final rule amends the definition of an eligible employer and excludes employers engaged in what the Department determines to be “substantially illegal activit[ies],” in such a way that employees of certain previously eligible employers may ultimately be excluded from the PSLF program. As a result, borrowers who have completed a substantial percentage (or nearly all) of their qualifying loan payments may shortly lose PSLF eligibility. This risk appears to be particularly high for employees of nonprofit organizations engaged in immigration support services and policy advocacy, LGBTQ+ advocacy efforts, and racial and social equity advocacy.

The Department’s Definition of “Substantial Illegal Purpose”

The final rule explicitly defines “substantial illegal purpose” as: (1) aiding or abetting violations of federal immigration laws; (2) “supporting terrorism, including by facilitating funding to, or the operation of, cartels designated as Foreign Terrorist Organizations […] or by engaging in violence for the purpose of obstructing or influencing Federal Government policy;” (3) engaging in the use of hormonal therapy or gender affirmation surgery for individuals under 19 years of age, in violation of federal or state laws, which the final rule terms “the chemical and surgical castration or mutilation of children;” (4) “engaging in the trafficking of children to another State for purposes of emancipation from their lawful parents in violation of Federal or State law;” (5) engaging in a pattern of “aiding and abetting illegal discrimination”; or (6) engaging in a “pattern of violating State laws” through a final, nondefault state court judgment of trespassing, disorderly conduct, public nuisance, vandalism or the obstruction of highways.

New Process for Determining Employer Eligibility

The final rule establishes a new process for the Department to determine which governmental and nonprofit entities are “qualifying employers” for purposes of PSLF. The rule empowers the Department to disqualify an employer if, by a preponderance of the evidence, on or after July 1, 2026, the employer has engaged in illegal activities “such that the organization has a substantial illegal purpose.” The rule discusses specific evidence the Department will construe as “conclusive” in making this determination, including a final judgment by a state or federal court, a plea of guilty or nolo contendere, or a settlement by an employer that includes an admission that it engaged in illegal activities such that it has a substantial illegal purpose.

If the Department finds that an employer has a substantial illegal purpose, the Department will provide the employer with a notice of findings and an opportunity to review and respond to the Department’s findings. Employers under review will continue to be qualified employers until a final determination is made by the Department. In this “employer reconsideration process,” the Department will consider the “materiality” of any illegal activities or actions, which must be “central to the organization’s mission, not incidental actions by individuals acting outside the scope of their employment.” Further, although the Department may consider allegations as a basis to start an inquiry, it has stated that it must develop a factual record to substantiate any allegations. The Department will purportedly use “clear and objective standards to measure ‘substantial,’ weighing the scope, frequency, and intent of the conduct.” The final rule itself, however, does not provide examples of these standards, and the criteria for enforcement remain as yet unclear.

Employers that lose their qualified status due to such a finding may regain their eligibility by either (1) reapplying to serve as a qualifying employer 10 years after the date of the determination of ineligibility; or (2) entering into a corrective plan, signed by the employer, that includes a certification that the employer is “no longer engaging in activities that have a substantial illegal purpose” as well as a report describing the employer’s ongoing compliance efforts and related internal controls.

If a previously PSLF-qualified employer is deemed ineligible, both the employer and affected otherwise-eligible borrowers will be given notice of the determination. The final rule does not provide an independent avenue through which borrowers may challenge an employer’s qualification status. However, in the context of an employer determination appeal, the borrower may assist the employer by providing evidence to support the employer’s contention that its activities do not constitute a “substantial illegal purpose.”

Challenges to the New Rule

On November 3, 2025, U.S. cities including Boston, Albuquerque, Chicago, San Francisco and Santa Clara, along with several nonprofit organizations, filed a complaint challenging the new rule as unconstitutional and a violation of the Administrative Procedure Act (APA). Commenters had previously raised similar issues during the notice-and-comment period of the rulemaking process, arguing equal protection concerns that the final rule violates the Fifth Amendment’s due process clause and would disproportionately affect organizations serving marginalized or disadvantaged populations. Generally, notwithstanding those stated concerns from commenters, the final rule did not make any material changes to the rule as initially proposed.

On the same day, a coalition of attorneys general from 21 states and the District of Columbia also filed a complaint challenging the final rule. That complaint argues that the rule’s “substantial illegal purpose” standard is both unconstitutionally vague and sufficiently arbitrary and capricious to constitute a violation of the APA.

Conclusion

Although it is not yet clear how the Department will specifically apply the final rule, the language of the rule and other policy actions undertaken by the current administration indicate the most significant impact will be on employees of nonprofits and service organizations focused on immigration, LGBTQ+ advocacy, and racial and social equity issues. That said, all employers who are currently considered “qualifying employers” for PSLF purposes should consider engaging with legal counsel to evaluate how the final rule may impact their qualification status and capacity to provide employees with PSLF eligibility, ahead of the July 1, 2026, effective date.

For More Information

For further information, you may contact the authors.

Legal clerk Caitlin E. Kwalwasser contributed to this update.