Key Points
- The Department of Education finalized a rule redefining “qualifying employers” for the Public Service Loan Forgiveness (PSLF) program to exclude organizations that engage in unlawful activities deemed to have a “substantial illegal purpose.”
- The rule, effective July 1, 2026, aims to ensure taxpayer funds do not subsidize organizations found to violate federal or state law, including aiding illegal immigration or supporting terrorism.
- Borrowers will continue to receive PSLF credit until the effective date of any employer’s disqualification, but may lose future eligibility if they remain with an ineligible organization.
The U.S. Department of Education announced on October 30, 2025, that it will move forward with a final rule amending the Public Service Loan Forgiveness (PSLF) program - a major change to one of the government’s most consequential student loan forgiveness initiatives.
The rule follows Executive Order 14235, signed by President Trump in March 2025, directing the Department to restore PSLF “to its statutory purpose” by excluding organizations engaged in unlawful or harmful activities from receiving indirect taxpayer subsidies. While this sounds practical on the surface, the definitions and implementation are concerning to borrowers.
Originally enacted in 2007 to encourage public service careers by forgiving student loans after 10 years of qualifying employment and payments, the PSLF program has long been criticized for administrative confusion, high denial rates, and shifting eligibility standards.
The Department says this rule “restores integrity” by ensuring forgiveness benefits only those working for lawful public service organizations.
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What The Rule Changes
Under the new regulations, published in the Federal Register on October 31, 2025 (PDF File), the Department formally amends Section 685.219 of Title 34 of the Code of Federal Regulations. The new definition of a “qualifying employer” excludes organizations that engage in illegal activities such that they have a “substantial illegal purpose” .
The rule identifies specific types of illegal conduct that could trigger disqualification:
- Aiding and abetting violations of federal immigration laws.
- Supporting terrorism or using violence to influence federal policy.
- Performing surgical or chemical castration or mutilation of minors in violation of law.
- Trafficking minors across state lines for unlawful emancipation.
- Repeated violations of state laws or aiding illegal discrimination.
The Department will determine whether an employer has a “substantial illegal purpose” using a preponderance of the evidence standard. Final judgments, guilty pleas, or settlements admitting illegal conduct may serve as conclusive evidence.
Employers found ineligible can reapply after 10 years or seek to regain eligibility through a corrective action plan approved by the Secretary.
Impact On Borrowers And Their Employers
For current PSLF participants, the Department emphasized that the rule will not retroactively disqualify any previous payments or employment months. Borrowers will continue to receive credit up to the effective date of any employer’s disqualification determination.
However, after July 1, 2026, any borrower working for a disqualified employer will no longer accrue qualifying payments unless they change jobs. The Department will provide notifications to both employers and borrowers if an organization’s status changes and update the PSLF Help Tool database within 30 days of any determination .
Employers will be provided with notice and opportunity to respond during the determination process. However, this rule does not have a pathway for borrowers to appeal.
Reaction To The Rule
Public comments on the proposed rule, first published in August 2025, reflected a divided response. Of the nearly 14,000 comments submitted, supporters described the rule as a long-overdue safeguard to prevent taxpayer funds from subsidizing illegal activity. Critics, including advocacy and legal aid organizations, warned that the broad language could create confusion, chill lawful advocacy work, or inject political considerations into PSLF eligibility decisions.
The Department rejected claims that the rule is politically motivated or unconstitutional, asserting that the Higher Education Act grants broad authority to regulate Title IV loan programs. It also cited longstanding legal doctrines, such as the IRS “illegality doctrine”, as justification for denying benefits to organizations engaged in unlawful activity.
While acknowledging that some borrowers could lose PSLF access if their employers are later deemed ineligible, the Department said this outcome is outweighed by “the federal government’s interest in ensuring that taxpayer funds are not used to subsidize illegal conduct.”
In a joint statement by Protect Borrowers and Democracy Forward, "This is a direct and unlawful attack on nurses, teachers, first responders, and public service workers across the country. Congress created the Public Service Loan Forgiveness (PSLF) program because it is important for our democracy that we support the people who do the hard work to serve our communities. This new rule is a craven attempt to usurp the legislature’s authority in an unconstitutional power grab aimed at punishing people with political views different than the Administration’s. In our democracy, the president does not have the authority to overrule Congress. That’s why we will soon see the Trump-Vance Administration in court.”
What Happens Next?
The Department estimates that fewer than ten organizations per year will be affected by the rule. Most borrowers will see no change to their PSLF eligibility, provided their employers remain in good legal standing.
The rule marks one of the Trump Administration’s most significant reversals of the Biden-era PSLF expansions, which temporarily broadened eligibility through pandemic-era waivers. Those waivers, which counted previously ineligible payments, led to over 850,000 borrowers receiving PSLF forgiveness through 2024.
Borrowers in PSLF need to remember that no changes will happen until after July 1, 2026, at the earliest. Even then, there is a process that will have to happen before an employer is disqualified. And finally, qualifying payments cannot be taken away retroactively - it would only apply to future payments after the final date of determination.
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Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.