April 9, 2026
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.”
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. 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 is particularly high for employees of nonprofit organizations engaged in immigration support services and policy advocacy, LGBTQ+ advocacy efforts, and racial and social equity advocacy.
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 that has engaged in activities on or after July 1, 2026, “such that the organization has a substantial illegal purpose” as defined by the Department under the final rule.
If the Department finds that an employer has a “substantial illegal purpose” as defined under the final rule, the Department will provide the employer with a notice of findings and an opportunity to review and respond to the Department’s findings. In this “employer reconsideration process,” the Department will consider the “materiality” of any alleged 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.” 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.
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. A coalition of non-profit advocacy organizations filed a case in the U.S. District Court for the District of Columbia involving similar allegations on November 4, 2025. All of these cases are actively undergoing briefing and awaiting judgment.
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.
The full article in its original form can be found at: https://www.faegredrinker.com/en/insights/publications/2025/11/us-department-of-education-narrows-scope-of-the-public-service-loan-forgiveness-program
Asher Friedman Young (LAW ’24) is an Associate in Faegre Drinker’s Government & Regulatory Affairs practice group.
John Przypyszny, Jonathan Tarnow, and Cindy Irani are Partners at Faegre Drinker. Sarah Pheasant is a Senior Government & Regulatory Affairs Attorney at Faegre Drinker. Caitlin Kwalwasser is a Legal Clerk at Faegre Drinker.