Public Service Loan Forgiveness faces major rule change: who could lose eligibility and what borrowers should do now

What the PSLF rule changes

• New employer screen. PSLF will continue to serve government agencies and most 501(c)(3) nonprofits. But the department can now exclude organizations it determines engage in unlawful activity that amounts to a “substantial illegal purpose.”

• Scope of disqualification. If an employer is excluded, all employees of that organization stop accruing qualifying payments from the date the disqualification takes effect.

• Appeals and reentry. The rule outlines appeal mechanisms and potential paths to regain eligibility after corrective action, though details and timelines will matter in practice.

• Effective timing. The framework is set to kick in on July 1, 2026. Borrowers remain in their current PSLF trajectories until then unless further guidance accelerates implementation.

Who may be affected

The department’s examples of a “substantial illegal purpose” span conduct such as supporting terrorism or aiding unlawful immigration, along with other violations of federal or state law. Critics warn the language could be applied to advocacy nonprofits, social-service providers, or medical organizations whose work touches legally or politically contested areas. Government agencies and traditional charities performing routine public services face low risk of disqualification; advocacy-heavy groups could face higher scrutiny.

Key facts about PSLF (unchanged)

• 120 qualifying payments (typically ten years) while working full-time for a qualifying employer.

• Only Direct Loans qualify; other federal loans may need consolidation to start the PSLF clock.

• Borrowers must submit annual employment certification and a final application to receive forgiveness.

• Tax treatment: PSLF forgiveness remains federally tax-free.

If you’re counting on PSLF, do this now

1) Lock down your paperwork.
Submit or update your PSLF form (employment certification) for your current and past public-service jobs. This time-stamps qualifying months before any future employer determinations.

2) Map employer risk.
Ask HR for your organization’s official status (government, 501(c)(3), or other nonprofit) and whether the employer has ever been flagged in federal or state proceedings relevant to the rule’s criteria.

3) Keep copies of everything.
Retain pay stubs, offer letters, and job descriptions. If an employer is later challenged, a clean record helps preserve your already-earned payment count.

4) Check your loan type and plan.
Confirm you have Direct Loans and are on a qualifying repayment plan. If consolidation is needed, understand how it could reset certain counts and whether a buyback or account adjustment option might mitigate that (where available).

5) Watch for employer notices.
If your organization receives a preliminary determination, expect instructions on appeals or corrective action. During any review window, keep making qualifying payments and save confirmation of submission for all PSLF forms.

What happens if your employer is disqualified after July 1, 2026?

• Payments you already earned still count. The rule preserves past qualifying months.

• Prospective months stop. Continuing to work at that employer won’t accrue new qualifying payments until eligibility is restored.

• Switching employers. Moving to a qualifying employer resumes accrual toward 120 months; your prior total travels with you.

• Appeals & reinstatement. If the employer’s appeal succeeds—or a corrective plan is approved—qualifying months can resume without restarting from zero.

Timeline snapshot

Borrower scenarios to consider

• Teachers, nurses, first responders in government roles: Minimal change anticipated—continue normal PSLF maintenance.

• Employees at advocacy or specialized nonprofit clinics: Heightened monitoring; submit certifications now, and track any employer legal developments.

• Mixed-status nonprofits (affiliates, fiscal sponsors): Seek clarity on which entity is your actual employer of record; PSLF status can hinge on that distinction.

• New grads weighing offers: If PSLF is central to your financial plan, favor employers with clear, durable eligibility and low regulatory risk.

This is the most consequential PSLF policy shift in years. It does not undo the progress borrowers have already made, but it could change the path forward for some nonprofit workers starting July 1, 2026. The safest moves right now are administrative, not dramatic: certify employment, document your qualifying months, confirm your loan setup, and track employer communications. Legal challenges and further implementation guidance are likely; until then, staying current on payments and paperwork is the best shield against uncertainty.