The Education Department's rewrite of Public Service Loan Forgiveness died one day before it was scheduled to take effect. On June 30, federal judges in Massachusetts and Washington, D.C., separately vacated the department's new employer-eligibility rule. For nonprofit employers, the immediate result is plain: the longstanding rules, under which every 501(c)(3) is a qualifying employer, remain in force.
PSLF, created by Congress in 2007, forgives a borrower's remaining federal Direct Loan balance after 120 qualifying monthly payments made while working at least 30 hours a week for a government agency, a 501(c)(3), or certain other public-service nonprofits. More than 1 million public service workers have received forgiveness through the program. For nonprofits that cannot match private-sector salaries, it is one of the few recruiting benefits that costs the organization nothing.
A Rule Built to Disqualify Employers
The vacated rule grew out of a March 2025 executive order directing the department to exclude organizations the administration considered engaged in illegal activity. The department published the final rule on October 31, 2025, after a negotiated rulemaking session that ended without consensus. It would have let the Secretary of Education strike an employer from the program after determining, by a preponderance of the evidence, that the organization engaged in activities with a "substantial illegal purpose."
The rule's enumerated categories included aiding violations of federal immigration law, supporting terrorism, engaging in a pattern of illegal discrimination, and providing certain medical treatments to transgender minors. A disqualified employer would have stayed out of the program for up to 10 years unless it won approval of a corrective action plan, and its employees would have stopped earning PSLF credit from the date of the determination, per the department's fact sheet. Legal challenges landed quickly in two federal courts.
What Did the Courts Actually Decide?
Both courts concluded that Congress, not the Education Department, sets the boundaries of PSLF, and that the statute's definition of public service employment leaves no room for an executive carve-out. In Massachusetts, ruling on consolidated cases brought by 22 states and the District of Columbia and, separately, by the National Council of Nonprofits with a coalition of cities, unions, and nonprofits, Judge Myong J. Joun held that the rule exceeded the department's authority, was arbitrary and capricious, and raised First Amendment problems by chilling lawful speech and services. In Washington, Judge Amir H. Ali reached the same bottom line the same day in a suit brought by the Robert F. Kennedy Center for Justice and Human Rights, the American Immigration Council, youth-services provider The Door, and the League of United Latin American Citizens Institute.
Because the rulings vacated the rule rather than blocking it only for the plaintiffs, the outcome applies nationwide. As NASFAA noted, the prior regulations and the existing definition of a qualifying employer simply stay in effect.
Your 501(c)(3) Status Still Does the Work
Nothing about your organization's PSLF standing changed, and nothing new is required of you. Still, mid-year is a reasonable moment for three low-effort checks:
- Confirm your listing. Search your EIN in Federal Student Aid's employer search tool and make sure your organization appears and shows as eligible. Errors here can stall employees' paperwork.
- Nudge staff to certify annually. Employees lock in credit by submitting the PSLF employment certification form each year, not just when they hit 120 payments. A one-line reminder at your next all-staff meeting costs nothing.
- Say it in job postings. If you compete with the private sector for talent, name PSLF eligibility in your benefits list. For a candidate carrying graduate-school debt, it is real money.
The Appeal Window Is What to Watch
The department can appeal both rulings, and observers expect it to. Even if an appeals court revived the rule, disqualification would still require a case-by-case determination with notice and an opportunity to respond, so no organization would lose eligibility overnight. As of mid-July 2026, no employer was ever disqualified under the rule: it was vacated before its effective date.
This is the sector's second brush this year with federal rules rewritten midstream; if your organization also holds federal grants, see our coverage of the proposed grant-rule overhaul OMB aims to have in effect by October 1. We track both on our Compliance & Governance page.
The takeaway
PSLF works today exactly as it did a year ago: 501(c)(3) employment qualifies, full stop. Spend 10 minutes this month confirming your employer listing and reminding staff to file their annual certification. Watch for an appeal, but do not restructure anything around a rule that no longer exists.