Can your nonprofit lose PSLF status?

For nearly two decades, the Public Service Loan Forgiveness Program has made a straightforward promise: Make 120 qualifying payments while working full-time for a government agency or 501(c)(3) nonprofit, and any remaining balance of federal student loans will be forgiven. This idea has helped schools, hospitals, local governments, and nonprofit organizations recruit workers who might otherwise avoid low-paying public service jobs.

This certainty changed when the Department for Education finalized a regulation allowing the Minister to declare an employer ineligible if it “has a significant unlawful purpose”. Although the Department says the rule targets organizations that intentionally engage in conduct that violates federal or state law, the standard is broad, unclear, and open to interpretation.

The rule is currently scheduled to go into effect on July 1, 2026. Borrowers don’t have anything they can do to prepare — except watch and wait…

How workers can lose eligibility for loan forgiveness

The introduction of the employer-based exclusion increases risks that were not associated with PSLF in the past. Here are the main ways in which the rule can interrupt or eliminate a borrower’s path to forgiveness.

1. Loss of qualified employer status

If a non-profit or government agency is found to have a “substantial unlawful purpose,” the minister can strip it of its eligibility. This means that all current employees will immediately lose access to PSLF unless they move to another eligible employer.

2. Payments may stop counting

Workers who thought they were eight or nine years into the 10-year track could learn that their payments are no longer eligible Go ahead. This change can add years of repayment and increase the total interest paid.

3. Uncertainty for mission-sensitive employers

Organizations working in immigration services, youth health programs, or some civil rights work have raised concerns about how the rule will be interpreted — politically. The lack of clear thresholds for what is considered “material” compounds the concern.

4. Borrowers may be reluctant to accept public service roles

It could weaken employment in jobs that are already difficult for employees to hire — child welfare agencies, public schools, legal aid offices, rural clinics, and municipal agencies that rely on PSLF incentives to attract workers with advanced degrees.

5. Borrowers must now monitor employer risk

PSLF always requires documentation of employment. What’s new is that previously eligible employers can be denied eligibility. Borrowers should pay attention if there is a change in employer status.

Lawsuits challenging the rule

Major lawsuits are already underway:

• A coalition of states led by attorneys general in New York and Massachusetts say the department overstepped its authority and introduced an arbitrary standard that could deny workers benefits promised by Congress.
• A coalition of cities and partner groups say the rule puts nonprofits under an indefinite and unpredictable test that could penalize legitimate work in public service.

Plaintiffs are seeking injunctions that could delay or prevent implementation before 2026. For now, the rule remains on the books.

What public service workers can do now

Nothing… There is nothing the individual worker can do now (and no worker should change their plans yet).

The rule does not allow workers to appeal employer decisions – only employers can appeal.

Furthermore, nothing can be changed retrospectively – so workers at public service employers must continue to work unless there is a decision against their employer. The Department of Education said fewer than 10 employers should be affected annually.

But the reality is that the rule introduces a layer of unpredictability that borrowers with PSLF have never experienced before. Households that have built budgets around loan cancellation may eventually have to reconsider long-term plans, especially if their employer is involved in any legal or regulatory dispute.

Borrowers approaching forgiveness are most at risk: Losing qualified employer status late in the process can change repayment timelines or require getting a new job.

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