The U.S. Department of Education (“Department”) has published a Notice of Proposed Rulemaking (“NPRM”) announcing proposed regulations under which qualifying nonprofit organizations may be excluded from eligibility for the Public Service Loan Forgiveness program (“PSLF”). As the NPRM notes, “the proposed changes would have meaningful implications for borrowers, taxpayers, and the Department.” Comments on the Department’s proposed regulations are being accepted through the Federal eRulemaking Portal at www.regulations.gov until September 17, 2025.
PSLF enables individuals who work in public service jobs for at least 10 years to have their remaining federal student loan balances forgiven after making 120 monthly payments under a qualified repayment plan. By statute, a “public service job” is defined, in part, to include full-time employment at any organization that is described in section 501(c)(3) and exempt from taxation under section 501(a) of the Internal Revenue Code. The statute also identifies specific examples of public service jobs that qualify for PSLF regardless of whether the employer is a 501(c)(3) organization. These include employment in emergency management, government (except as a member of Congress), military service, public safety, law enforcement, public health, health care practice and support, public education, social work in a public child or family service agency, public interest law services, early childhood education, public service for the elderly or individuals with disabilities, school-based library sciences and other school-based services, and teaching as a faculty member at a Tribal College or University and other faculty teaching in a high-need subject area or in an area of shortage.
The proposed regulations, in effect, would redefine the statutory term “public service job” for purposes of PSLF eligibility by excluding employment with organizations that the Department determines have engaged, on or after July 1, 2026, in “activities that have a substantial illegal purpose.” The proposed regulations define the following activities as having a substantial illegal purpose:
- aiding or abetting violations of 8 U.S.C. 1325 or other Federal immigration laws;
- supporting terrorism, including by facilitating funding to, or the operations of, cartels designated as Foreign Terrorist Organizations consistent with 8 U.S.C. 1189, 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; or
- engaging in a pattern of violating State laws [on (i) trespassing; (ii) disorderly conduct; (iii) public nuisance; (iv) vandalism; or (v) obstruction of highways].
Under the proposed regulations, the Department would determine that an organization has engaged in such activities by a preponderance of the evidence, after providing notice and an opportunity for the organization to respond and “considering the materiality of any illegal activities or actions.” The Department would consider civil judgments in state or federal court, pleas of guilty or nolo contendere, and settlements that include relevant admissions of liability as “conclusive evidence” that an organization has engaged in activities having a substantial illegal purpose. In addition, the proposed regulations would create a self-certification process under which organizations would either certify that they have not participated in activities that have a substantial illegal purpose or be removed from the PSLF qualifying employer list. According to the NPRM, this rule reflects the Department’s view that an organization failing to certify its compliance with the proposed standards “is affirming that it engaged in activities that have a substantial illegal purpose.”
The Department estimates that, each year, “less than 10 employers” would lose PSLF qualifying employer status under the proposed regulations. For nonprofits, losing PSLF eligibility could pose a significant threat to recruiting and retention. According to the American Bar Association, for example, many nonprofit legal employers “report they could not fill critical attorney positions without the promise of PSLF eligibility.” In a survey conducted by the National Legal Aid and Defender Association (“NLADA”), a majority of senior executives at civil legal aid and public defender programs described PSLF as “a highly important tool for retaining experienced staff” that was also “important for attracting new hires.” Among student-loan borrowers employed by such organizations, according to NLADA, “87 percent of respondents indicated that qualification for PSLF would make them much more likely to accept a particular opportunity in the future,” and “more than half” reported that they “would be very likely or certain to leave their jobs if PSLF did not exist.”
If finalized, the NPRM may have ramifications beyond employee recruitment and retention. For example, “substantial illegal purpose” is sometimes a reason cited by the Internal Revenue Service (“IRS”) for denying or revoking an organization’s federal tax-exempt status. The NPRM states that the Department based its approach to the proposed regulations in part on this IRS standard but does not state whether the IRS was consulted regarding the Department’s proposed definition of “substantial illegal purpose.”
Concerned organizations should consider submitting comments on the NPRM.