The court fight over who counts as a qualifying employer for Public Service Loan Forgiveness is not over. On August 27, the Department of Education filed notices of appeal in the two cases that struck down its PSLF employer rule in June, sending one case to the First Circuit and the other to the D.C. Circuit. For nonprofit employers and their staff, nothing changes today. The rule remains vacated, and PSLF keeps operating under the standards that were in place before the rule. But the question of whether a future Education Secretary can disqualify your organization returns to live litigation, with briefing expected to stretch into 2027.
What the vacated rule would have done
The regulation, finalized last October and scheduled to take effect July 1, would have let the Education Secretary exclude employers found to engage in activities with a "substantial illegal purpose" from the definition of qualifying PSLF employment. Employees of an excluded organization would have stopped earning credit toward forgiveness, a sharp break from a program that has anchored eligibility in nonprofit and government employment since 2007. Critics, including the plaintiff nonprofits, argued the standard tracked the administration's policy positions rather than any settled body of criminal law, and that it handed the department a tool to pressure organizations over their missions.
On June 30, one day before the effective date, two federal district courts vacated the rule in parallel cases. In National Council of Nonprofits v. McMahon, Judge Myong J. Joun of the District of Massachusetts found the rule contrary to law, arbitrary and capricious, and a violation of the First Amendment; the ruling also resolved a companion challenge brought by 22 states and the District of Columbia. The same day, the federal district court in Washington granted summary judgment to the Robert F. Kennedy Center for Justice and Human Rights and its co-plaintiffs. We covered the rulings when they landed in our piece on the PSLF employer rule decision.
The appeals change the timeline, not the current rules
The department filed its notices near the end of the 60-day appeal window, and a notice of appeal contains no legal arguments; those arrive with opening briefs. According to NASFAA's litigation coverage, the vacatur stays in effect while the appeals proceed, which means the department cannot implement the rule in the meantime. As of the filings, no stay motion had been reported on either docket. Briefing schedules in the two circuits will likely run through late 2026, with decisions possible in 2027, and the losing side in either circuit could ask the Supreme Court to weigh in after that.
What nonprofit employers should do now
Keep doing what you were doing. Your organization's PSLF status is unchanged: employment at a 501(c)(3), a government employer, or certain other not-for-profits providing qualifying public services still counts, and employees keep earning credit so long as they meet the program's other requirements, which include working full-time, holding federal Direct Loans, and making 120 qualifying payments. Staff with federal student loans should continue certifying employment regularly through the PSLF program on StudentAid.gov, because a certified record is the best protection against any future eligibility dispute. If you administer HR for a nonprofit, it costs nothing to remind employees to submit the certification form annually; recruiting research has long treated PSLF as part of the nonprofit compensation story, so it is worth protecting.
Worth watching alongside the appeals: the phrase "substantial illegal purpose" is doing work elsewhere in Washington. The National Council of Nonprofits reports that Treasury and the IRS are reportedly weighing a draft plan that would apply a similar standard to tax-exempt status itself, and members of Congress have introduced bills that would require evidence and due process before any revocation. How the First Circuit and D.C. Circuit treat the standard in the PSLF context may shape those fights too. Our explainer on how the IRS revokes exempt status covers what that separate process actually requires.
One caution as you communicate with staff: appellate outcomes here turn on administrative law and constitutional questions no one can handicap with confidence, and none of this is legal advice for your organization's situation. If your nonprofit works in an area the vacated rule appeared to target, such as immigration services or gender-affirming care, counsel watching these dockets is money well spent.
The takeaway
The Education Department has appealed both June 30 rulings that vacated its PSLF employer rule, so the issue is alive in the First Circuit and the D.C. Circuit. Nothing changes while the appeals run: the rule stays vacated, nonprofit employment still qualifies, and employees should keep certifying employment on StudentAid.gov. Expect briefing into 2027, and watch whether the "substantial illegal purpose" standard resurfaces in tax enforcement debates. The practical move for EDs is small and immediate: nudge your staff to file their employment certifications, and keep this one on the board's watch list rather than its worry list.