Two federal courts have ruled the U.S. Department of Education‘s PSLF rule blocked in separate decisions handed down this week, finding that the administration’s attempt to narrow eligibility for the Public Service Loan Forgiveness programme was unlawful, arbitrary, and in excess of statutory authority.
The rule, published on 31 October 2025 at 90 FR 48966 and set to take effect on 1 July 2026, amended the definition of a ‘qualifying employer’ to exclude organisations deemed to have a ‘substantial illegal purpose.’ It identified six categories of conduct the administration considered disqualifying, including aiding or abetting violations of federal immigration laws and what it described as ‘child abuse, including the chemical and surgical castration or mutilation of children or the trafficking of children to so-called transgender sanctuary States.’
The Statutory Background and What the Rule Changed
Congress created the Public Service Loan Forgiveness programme in 2007, recognising ‘the need to encourage matriculation and retention in public service.’ It forgives the balance of a borrower’s student loan after ten years of qualifying public service employment and 120 loan payments.
The Department issued the rule pursuant to Executive Order 14235, signed by President Trump in March 2025 and titled ‘Restoring Public Service Loan Forgiveness,’ according to LeadingAge. In its preamble, the Department cited the IRS illegality doctrine, arguing that ‘revocation of statutory benefits to organisations engaged in illegal activities is proper if its purposes and activities are illegal or otherwise contrary to public policy,’ as Morgan Lewis noted in its analysis of the final regulations.
The regulatory text also introduced a preponderance-of-the-evidence standard for the Department to apply when evaluating whether an employer has a substantial illegal purpose. In assessing whether a lawyer’s services are lawful, the Department said it would consider consistency with ‘public policy,’ which it interprets to include administration policies, according to the American Bar Association. The proposed rule drew nearly 14,000 comments before the final version was issued.
The Department also revised the rule’s language from ‘engaged in activities that have a substantial illegal purpose’ to ‘engaged in activities such that it has a substantial illegal purpose,’ indicating an intention to focus on organisations whose unlawful conduct is material to their mission rather than incidental, according to NACUBO.
Why the PSLF Rule Was Blocked: The Courts’ Reasoning
In the Massachusetts case, U.S. District Judge Myong J. Joun, a Biden appointee, issued a 68-page order the day before the rule was due to take effect. A coalition of 22 states had sued to block the change. Judge Joun found the rule ‘contrary to law and promulgated in excess of statutory authority,’ as well as ‘arbitrary and capricious,’ and ruled that it ‘violates the First Amendment.’
The administration had argued there was no real threat of enforcement because the Department had not indicated any plaintiff would be targeted. Judge Joun rejected that reasoning, pointing to the administration’s conduct in other areas: ‘In the absence of evidence to the contrary, Defendants’ arguments might be persuasive. But the Administration’s history of prosecution tells a different story,’ he wrote, citing the ‘ire’ shown toward organisations with immigration policies contrary to administration positions.
On the question of vagueness, Judge Joun was direct. ‘The rule thus leaves regulated entities to speculate about the scope of prohibited conduct while vesting the Department with substantial discretion to determine, after the fact, whether an employer has crossed an undefined line,’ he wrote. ‘By failing to articulate objective standards governing what constitutes “substantial illegal activity,” “aiding and abetting,” or a “pattern” of unlawful conduct, the Department has left employers to guess at their obligations while reserving broad discretion to determine eligibility on an ad hoc basis. That lack of ascertainable standards is itself a hallmark of arbitrary and capricious decision-making.’
Judge Joun also found the rule ‘chills protected speech and attempts to force PSLF beneficiaries to adopt the administration’s policy views,’ as Inside Higher Ed reported.
In Washington D.C., U.S. District Judge Amir H. Ali, also a Biden appointee, ruled similarly, finding that Education Secretary Linda McMahon had exceeded her statutory authority. Plaintiff organisations in that case had argued that a certification requirement, compelling them to affirm they had not engaged in activities with a ‘substantial illegal purpose,’ imposed obligations beyond simply following existing law. More than 20 states and a coalition of nonprofit groups were among the plaintiffs across both suits, according to The Hill, with the Massachusetts case accounting for 22 of those states specifically.
Subject to any onward appeal, both rulings preserve access to PSLF eligibility for employers in the six categories the administration sought to exclude. The Department of Education has not publicly indicated whether it will seek a stay pending appeal, and any emergency application to a circuit court could determine whether the 1 July 2026 effective date becomes practically moot before the merits are resolved.
