Public Service Loan Forgiveness faces major eligibility shift as new rule targets certain nonprofits

A sweeping update released on Thursday, October 30, 2025, would change who qualifies for Public Service Loan Forgiveness (PSLF) by redefining which employers count. The rule amends the definition of a “qualifying employer” to exclude organizations deemed to have a “substantial illegal purpose.” While borrowers’ past credited payments remain valid, future payments made while working at newly disqualified employers would not count toward the 120-payment threshold. The change is set to take effect July 1, pending expected legal challenges.

What’s changing in Public Service Loan Forgiveness

Under current PSLF rules, full-time work for government agencies and most 501(c)(3) nonprofits typically qualifies, as do certain other nonprofits that provide public services. The new regulation keeps government service in place but narrows the nonprofit category by allowing the Department to disqualify entire employers if their activities are judged to substantially involve unlawful conduct.

Key elements of the rule as finalized:

• Employer-based exclusions: Nonprofits can be ruled ineligible if the Department determines they have a “substantial illegal purpose.”

• Prospective impact: Payments already counted toward PSLF are not wiped out. The restriction applies to future qualifying-payment accrual while employed at a disqualified organization.

• Effective date: Scheduled for July 1. Implementation timelines could shift if courts intervene.

• Scope: Government employment (federal, state, local, tribal) still qualifies. Many nonprofits will continue to qualify; the change targets specific categories the Department deems out of bounds.

Who could be affected by PSLF employer changes

The most immediate risk is for borrowers whose qualifying status relies on nonprofit employment outside traditional government roles. Workers at organizations that, in the Department’s view, substantially engage in unlawful activity could see their future PSLF credit halted after the rule’s effective date.

Potentially impacted groups include:

• Nonprofits flagged for immigration-related activities that the Department characterizes as aiding unlawful conduct.

• Health or social-service organizations whose activities relating to minors could be interpreted as unlawful in certain jurisdictions.

• Advocacy groups engaged in protest activity that could be deemed to cross legal lines.

The rule does not automatically strip PSLF credit from entire sectors; rather, it creates a pathway to disqualify specific employers. However, the criteria—“substantial illegal purpose”—will likely be contested, and litigation could determine how broadly the Department can apply it.

What stays the same for Public Service Loan Forgiveness

• Past credit is preserved. If your previous employment and payments were already counted, those credits remain on the books.

• Government work still qualifies. Full-time employment with federal, state, local, or tribal agencies continues to accrue PSLF credit.

• Standard PSLF mechanics persist. Borrowers still need 120 qualifying payments made under a qualifying repayment plan on eligible Direct Loans while working full-time for a qualifying employer.

• Account adjustments continue. Ongoing payment-count reviews tied to income-driven repayment (IDR) adjustments can still boost PSLF counts where applicable.

What borrowers should do now

1) Verify your employer status.
Ask your HR office if they anticipate changes to PSLF eligibility under the new rule. If your organization expects to be affected, consider whether a move to a clearly qualifying employer (e.g., government or an undisputed 501(c)(3)) before the effective date aligns with your career and financial plans.

2) File the PSLF Form annually.
Submit or resubmit the PSLF Form (Employment Certification) for each employer to lock in credited periods. This is vital documentation if rules shift later.

3) Audit your payment count.
Log in to your loan servicer and compare posted PSLF counts with your records. If an IDR account adjustment has increased your tally, confirm the new number is reflected. Keep pay stubs, W-2s, and employment letters handy.

4) Stay current on repayment plan details.
Ensure you’re in a qualifying repayment plan and that each payment meets timing and amount requirements. If you recently changed plans, double-check your billing schedule so no payments fall short.

5) Watch the calendar—and the courts.
The scheduled July 1 effective date gives a runway to make informed choices. Legal challenges could delay, narrow, or block parts of the rule; until a court rules otherwise, plan based on the published timeline.

How this could reshape the PSLF landscape

For years, public service loan forgiveness has encouraged careers in government and mission-driven nonprofits. This rule pivots the program toward a narrower set of employers by introducing an enforceable standard around organizational legality. If applied broadly, some nonprofit subsectors may see hiring and retention pressures as workers weigh PSLF eligibility against mission alignment. Conversely, government agencies and undisputed 501(c)(3)s could become more attractive landing spots, particularly for mid-career professionals already deep into their 120-payment journey.

The ultimate impact hinges on implementation: how the Department defines “substantial illegal purpose,” how it conducts employer reviews, what notice process borrowers receive, and how courts interpret the Department’s authority. Borrowers should preserve documentation, certify employment proactively, and be ready to pivot if their organization is flagged.

Borrowers

• If you’re in government: Your PSLF path remains intact; keep certifying employment and making qualifying payments.

• If you’re in a nonprofit: Confirm whether your employer expects to remain qualifying; if uncertain, submit the PSLF Form now to bank past credit and evaluate options before July 1.

• If you’re nearing 120 payments: Precision matters—ensure every payment counts, maintain continuous qualifying employment, and monitor for updates that could affect final eligibility.

This is a developing policy change. Expect further guidance—and likely court action—in the days and weeks ahead.