HARMON CURRAN NONPROFIT LAW BLOG

On June 30, 2026, two federal judges vacated the Department of Education’s (“ED”) new Final Rule on the Public Service Loan Forgiveness (“PSLF”) program hours before it was set to go into effect. The Final Rule would have allowed ED to disqualify nonprofit employers from the PSLF program if the agency deemed that they engaged in activities with a “substantial illegal purpose.” We previously discussed the proposed regulations on September 9, 2025 in a blog post titled, “Department of Education Accepting Comments on Proposed PSLF Changes.” Nearly 14,000 parties submitted comments on the proposed rule.

Established by Congress in 2007, the PSLF program forgives the remaining balance of a borrower’s Federal Direct Student Loans 1) after they make 120 qualifying monthly payments 2) while working for a qualifying employer. Under the clear language of the authorizing statute, all organizations exempt under Section 501(c)(3) of the Internal Revenue Code qualify for the PSLF program. The new PSLF Final Rule nevertheless gives ED discretionary authority to determine that an organization has engaged in certain activities such that it has a substantial illegal purpose.

The Final Rule specifically targeted the following “illegal” activities:

• “aiding or abetting violations of 8 U.S.C. 1325 or other Federal immigration laws”;
• “supporting terrorism”;
• “child abuse, including the chemical and surgical castration or mutilation of children or the trafficking of children to so-called transgender sanctuary States”;
• “engaging in a pattern of aiding and abetting illegal discrimination”; and
• “engaging in a pattern of violating State tort laws, including laws against trespassing, disorderly conduct, public nuisance, vandalism, and obstruction of highways.”

Several parties sued to challenge the Final Rule on statutory and constitutional grounds. The U.S. District Court of Massachusetts consolidated two lawsuits challenging the Final Rule, one brought by the National Council of Nonprofits and a coalition of nonprofits, labor unions, employee associations, and cities, and another brought by 22 states and the District of Columbia. See National Council of Nonprofits v. McMahon, 1:25-cv-13242 (D. Mass. Jun. 30, 2026). The U.S. District Court of the District of Columbia heard a separate lawsuit brought by four nonprofit organizations. See Robert F. Kennedy Center for Justice and Human Rights v. McMahon, 1:25-cv-03860 (D.D.C. Jun. 30, 2026).

Both federal courts ruled that ED exceeded its statutory authority in promulgating the Final Rule, creating new definitions and placing new burdens on employers beyond the scope of what Congress intended. Judge Amir Ali of the U.S. District Court for the District of Columbia noted that the language of the PSLF statute “does not suggest – let alone say – that the Secretary can pick and choose among section 501(c)(3) organizations” to qualify under the program. Similarly, Judge Myong Joun for the U.S. District Court of Massachusetts stated that the Final Rule “plainly contradicts the unambiguous text of the PSLF [s]tatute and exceeds the scope of [ED]’s authority.” In addition, Judge Joun ruled that the Final Rule is arbitrary and capricious in that it “leaves regulated entities to speculate about the scope of prohibited conduct while vesting [ED] with substantial discretion to determine, after the fact, whether an employer has crossed an undefined line.” And Judge Joun further found that the Final Rule violates the First Amendment of the Constitution by trying to compel organizations to adopt the Trump Administration’s policy views.

Both courts vacated the rule, which had been set to go into effect July 1, 2026. This means that the Final Rule currently has no effect. The government has until August 31, 2026 to file an appeal. To change the outcome and have the Final Rule go into effect, the government would need to succeed in both appellate courts, or at the Supreme Court. While appeal is likely, the Supreme Court recently severely limited the ability of regulatory agencies to add requirements to statutes. Accordingly, it is questionable whether the Supreme Court would act to save the Final Rule given that the PSLF statute clearly applies to all section 501(c)(3) organizations.