Uncertainties for Employers and Borrowers under Department of Education’s New Public Service Loan Forgiveness Regulation
On October 31, 2025, the U.S. Department of Education (Department) issued a final regulation revising the Public Service Loan Forgiveness (PSLF) program. PSLF provides federal student loan relief to individuals who work for “qualifying employers” (primarily government and public interest employers) that provide services in areas such as public health, law enforcement, education, public safety, family services, disability services, and elder services. In a stark departure from prior versions of the regulation and the statutory language itself, the Department’s new rule adds exclusions for employers that the agency deems engage in “illegal activities” or operate with an “illegal purpose.”
Background
In 2007, Congress amended the Higher Education Act to provide for cancellation of outstanding balances of borrowers’ federal loans if they are employed in a public service job and have made 120 qualifying payments towards their loan debt. 20 U.S.C. §1087e(m). Congress’ statutory language provides a fairly comprehensive definition of the areas of employment it intended to cover under the new provision. 20 U.S.C. §1087e(m)(3)(B). The primary purpose of PSLF was to assist public sector agencies and non-profit organizations, whose missions are to provide critical and needed assistance to the public at large and to marginalized communities, in recruiting highly qualified and dedicated employees. Because these employers generally pay less than private sector employers, the partial loan cancellation provided by PSLF provides an added benefit in recruiting highly qualified and dedicated individuals.
In 2008, Education promulgated the first regulation implementing the statutory provision. 34 C.F.R. § 685.219. The regulation, which went into effect on July 1, 2009, essentially mirrored the language of the statutory provision. Between 2009 and 2021, the regulatory language was amended a number of times, changing the term “public service organization” to “qualifying employer,” and further defining some categories of employment set forth in the statute and prior regulations. The general parameters of individuals and entities covered under PSLF remained the same.
Changes Effective July 1, 2026
In response to the March 2025 Executive Order entitled “Restoring Service Public Loan Forgiveness,” the Department initiated rulemaking with the stated purpose of changing the provisions of PSLF to align with the President’s directive that the program’s eligibility criteria should prevent Federal funds from subsidizing activities that "harm our national security and American values.” To accomplish this goal, the Department proposed changes to the regulatory definition of “qualified employer” to exclude organizations that the agency determines have an “illegal purpose.” Notably, the new regulation gives the Secretary the authority to determine which employers meet this definition, and provides narrow opportunities for appeal and reinstatement following an employer’s disqualification. The Department stated that the purpose of the change is to protect the integrity of the PSLF program and ensure taxpayer funds do not support individuals or organizations engaged in “unlawful activity.”
During the mandatory negotiated rulemaking process, during which Department and stakeholder representatives meet for the purpose of determining whether they can come to an agreement, or consensus, that becomes the foundation for the proposed rule. Here, the negotiators did not reach consensus, and the Department proceeded with the Notice of Proposed Rulemaking (NPRM) on August 18, 2025. The final rule, published on October 31, 2025, goes into effect on July 1, 2026.
Changes to the Definition of “Qualified Employer”
The final rule changes the definition of “qualified employer” in 34 C.F.R. § 685.219(b)(27) to add “[d]oes not include organizations that engage in activities such that they have a substantial illegal purpose, as defined in this section.” The revised regulation goes on to define “substantial illegal purpose” to include activities such as “aiding and abetting violations of immigration laws; engaging in violence for the purpose of obstructing or influencing Federal Government policy; assisting in the transitioning of transgender youth, including transportation across state line for the purposes of emancipation; engaging in a pattern of aiding and abetting illegal discrimination; and engaging in a pattern of violating state laws covering trespassing, disorderly conduct, public nuisance, vandalism, or obstructing highways.” 90 Fed. Reg. 49001.
Practically speaking, the rule will likely be used to exclude employers with work tied to immigration and support for immigrant communities, student protests, gender-affirming care for minors, and organizations with diversity, equity, and inclusion initiatives.
If the Secretary, using the “preponderance of the evidence” standard set out in the regulation, determines that an employer has a “substantial illegal purpose” based on the provisions of the regulation, borrowers working for that employer will no longer receive credit for loan payments made while working for that disqualified employer. Crediting ceases at the time the determination is made by the Department that the borrower’s employer no longer meets the definition of a “qualified employer.”
A borrower does not have the right to request reconsideration of his/her employer’s disqualification when notified that loan payments will no longer be credited. The final PSLF rule provides employers with notice, access to the administrative record, and an opportunity to review, respond to, and rebut, the Department’s findings. Employers that are found to have a “substantially illegal purpose” will not be eligible to reapply for status until 10 years after the date of the determination unless they agree to enter into a corrective action plan with the Secretary.
Legal Challenges to the Proposed Rule
The regulation has already been challenged twice:
The first challenge comes from advocacy groups, teachers unions, and local cities as arbitrary and capricious and inconsistent with the Higher Education Act since the statutory language does not provide a basis for limiting employers whose mission and services meet the public service areas enumerated in the statute.
The second challenge comes from a coalition of two dozen states who argue that the policy could negatively affect teachers using “inclusive” curricula, immigration attorneys, and health care workers providing gender-affirming care. Protracted litigation on the regulation will place both borrowers and organizations in limbo.
Key Takeaways and Potential Harm
1. Vague language and inconsistent application
The language of the final regulation is vague and will likely result in inconsistent — and, critics note, politically-motivated — treatment of organizations’ work. The regulation provides a mechanism for the current administration to target organizations, including educational institutions, who provide valuable services to immigrants, transgender youth, minorities, and marginalized communities under the guise that their mission and activities serve an illegal purpose, if the organization does not adhere to the policies of the administration.
2. Hard choices for borrower employees
Since the crediting of loan payments for PSLF ceases immediately once the Department disqualifies an organization, borrowers will be put in the untenable position of having to leave their public service employer or lose the ability to obtain loan relief under PSLF, which many employees view as a vital part of their compensation structure. Organizations providing needed services in communities across the country will lose a valuable tool in helping to recruit highly qualified and dedicated employees.
How Sligo Law Group Can Help
The Department’s regulation, scheduled to go into effect on July 1, 2026, is already the subject of broad court challenges. Once it goes into effect, organizations who have been identified as qualified employers for purposes of PSLF, but who operate in spaces having to do with areas the regulation has deemed “substantially illegal,” may face Secretarial determinations that they no longer qualify.
Sligo Law Group can assist you in responding effectively and lawfully by:
Mapping organizational activities to rule criteria;
Reviewing mission and bylaws to ensure that the organization’s stated purpose and public-service orientation remain clearly aligned with PSLF’s eligibility requirements;
Conducting legal risk assessments to identify activities that may invite scrutiny under the new rule;
Representing the interests of organizations in legal challenges to negative findings by the Department; and
Negotiating corrective action plans that protect the mission of your organization and the interests of your employees.
Note: The above summary is for informational purposes only and does not constitute legal advice nor does it create an attorney-client relationship. Every situation is unique; for advice on your particular circumstances, please contact us at contact@sligolawgroup.com.