PSLF Case Update

Last month, on June 30, 2026, a federal district court vacated a Department of Education rule that would have permitted the Secretary of Education to exclude nonprofit and governmental employers from the Public Service Loan Forgiveness program if the Secretary determined that an organization had a “substantial illegal purpose.” The ruling resolved two related cases, National Council of Nonprofits v. McMahon, No. 1:25-cv-13242, and Massachusetts v. U.S. Department of Education, No. 1:25-cv-13244. Both cases were heard by Judge Myong J. Joun of the U.S. District Court for the District of Massachusetts.

The Department’s rule would have added a new eligibility restriction, in addition to making 120 qualifying payments while working in a “public service job.” An otherwise qualifying employer could have been disqualified if the Secretary determined, by a preponderance of the evidence, that the organization had engaged in activities demonstrating a “substantial illegal purpose.” The rule identified categories involving immigration laws, terrorism, specified conduct involving minors, illegal discrimination, and certain state-law violations. Once an employer was disqualified, payments made by its employees generally would no longer count toward loan forgiveness.

Judge Joun concluded that the Department lacked statutory authority to impose that additional condition. Congress had expressly identified the categories of employment qualifying as public-service jobs and had not delegated authority to the Department to disqualify employers that otherwise satisfied those requirements. Among other findings, the court held that the Department exceeded its authority in promulgating the new rule and that rule was arbitrary and capricious under the Administrative Procedure Act. 

The court further held that the rule violated the First Amendment. In Judge Joun’s view, the Department could not use access to the loan-forgiveness program to pressure nonprofits, local governments, and other employers to conform their lawful activities to the administration’s preferred policies. Allowing each administration to redefine supposedly illegal conduct through regulation would expose participating organizations to shifting political standards.

The court accordingly held the rule contrary to law, beyond the Department’s statutory authority, arbitrary and capricious, and inconsistent with the First Amendment. It set the rule aside in full before its scheduled July 1 effective date. The court’s June 30 memorandum of decision applies to both cases.