PSLF Litigation: Court Rules in Favor of Nonprofits — Rule Vacated

Update, July 27: On June 30 — one day before its scheduled effective date — two federal judges vacated the Department of Education’s overhaul of Public Service Loan Forgiveness (PSLF) employer eligibility. In Massachusetts, Judge Myong J. Joun ruled in National Council of Nonprofits et al. v. McMahon that the rule was “arbitrary and capricious” and violated the First Amendment, in a case brought by NCN together with cities, labor unions, and other nonprofit and employee associations. The same day, a companion suit brought by 21 states and the District of Columbia succeeded on similar grounds, and a separate nonprofit-led case in Washington, D.C. produced a parallel ruling from Judge Amir Ali. 

Why it matters: The vacated rule would have let the Secretary of Education strip PSLF eligibility from any employer found to have a “substantial illegal purpose” — a vague standard that organizations serving immigrant communities, providing gender-affirming care, or doing civil rights and equity work were most exposed to. With the rule struck down before taking effect, PSLF employer eligibility reverts to its pre-existing statutory definition, and nonprofit employers in those mission areas are no longer at immediate risk of disqualifying their employees from loan forgiveness. 

Where things stand: The rulings vacate the rule outright rather than simply pausing it; whether the administration appeals remains to be seen. Nonprofits with staff relying on PSLF can communicate that the July 1 rule did not take effect, while continuing to watch for any appeal. 

What happened: The U.S. District Court for the District of Massachusetts issued a decision in favor of the nonprofit sector in National Council of Nonprofits et al. v. McMahon, the lawsuit challenging the U.S. Department of Education’s final rule to overhaul the Public Service Loan Forgiveness program. The court held that the rule exceeds the Department’s statutory authority, is arbitrary and capricious in violation of the Administrative Procedure Act, and violates the First Amendment. The court vacated the regulation entirely — meaning it will not go into effect. NCN served as lead plaintiff in a coalition of more than a dozen cities, labor unions, and nonprofit organizations, and filed the lawsuit with the help of Democracy Forward and Protect Borrowers.

What the rule would have done: The rule would have allowed the Education Secretary to disqualify certain nonprofit employers from PSLF eligibility based on their missions — with key terms left entirely to the Secretary’s discretion. Organizations serving immigrant communities, providing gender-affirming care, or engaged in civil rights and equity work faced the most direct risk. Federal law makes clear that PSLF eligibility applies to all 501(c)(3) charitable nonprofits. By unlawfully excluding certain nonprofits, the rule would have set a troubling precedent allowing any administration — regardless of party — to change program eligibility based on its own priorities or ideology.

Why this matters for Pennsylvania nonprofits: PSLF helps ensure that talented individuals can afford to choose and remain in careers in public service — roles that are often lower-paying — without being burdened by long-term federal student debt. This ruling protects that program for nonprofit workers across Pennsylvania and the country. Communicate this outcome to any staff members who were concerned about their PSLF eligibility, and continue encouraging enrollment for eligible employees.

Related development — S.J. Res. 182:  NCN has endorsed S.J. Res. 182, introduced by Sen. Tim Kaine (D-VA), which would use the Congressional Review Act to overturn the PSLF rule entirely. The resolution currently lacks the votes needed to pass the Republican-controlled Senate, but its introduction signals ongoing congressional opposition to the rule and may create additional legal and political pressure. 

Update — May 2026

In April and May 2026, Senators Tim Kaine (D-VA), Kirsten Gillibrand (D-NY), and Cory Booker (D-NJ) introduced S.J.Res. 182, a Congressional Review Act resolution to overturn the Department of Education’s PSLF employer rule ahead of a Senate floor vote. The rule, effective July 1, 2026, would have let the Secretary of Education exclude employers deemed to have a “substantial illegal purpose” — a standard PANO and the National Council of Nonprofits warned was vague enough to threaten organizations serving immigrant communities, providing gender-affirming care, or doing civil rights work. PANO urged members to contact their U.S. Senators in support of the resolution while separately auditing their own PSLF exposure.