Department of Education Sued by States for Loan Eligibility Rule

New York Attorney General Leticia James and 20 other state attorneys general sued the U.S. Department of Education on November 3 over its new rule amending the definition of a “qualified employer” for the purpose of Public Student Loan Forgiveness program. The final rule was published on October 31 and will go into effect July 1, 2026.

On March 7, President Donald Trump signed an executive order directing the secretary of education to propose revisions to the PSLF program to ensure the definition of “public service” excludes organizations that “engage in activities that have a substantial illegal purpose.”

The final rule revises the definition of “qualifying employer” to exclude organizations that engage in activities deemed unlawful, including “supporting terrorism and aiding and abetting illegal immigration,” according to the DOE’s announcement on October 30.

The document also stated that, since it was enacted, “the PSLF program has been expanded through fiscally irresponsible pandemic-era waivers. Specifically, the waivers counted non-qualifying payments toward debt relief and utilized inadequate eligibility standard monitoring, allowing organizations to qualify despite engaging in illegal activities to the detriment of the public interest and American taxpayers.”

The complaint, filed in U.S. District Court for the District of Massachusetts, was brought by the attorneys general of Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, Washington and Wisconsin, as well as Washington, D.C.

Purpose of PSLF

In 2007, under the administration of former President George W. Bush, Congress established the PSLF program to encourage Americans to pursue public service by promising to forgive their remaining federal student loans after 10 years of both qualifying employment and monthly payments.

According to the DOE’s announcement, the “eligibility standards for what constitutes a qualifying public service employer have not been adequately monitored, allowing certain organizations to qualify despite engaging in illegal activities that harm their communities and the public good.”

In a statement, Under Secretary of Education Nicholas Kent said, “The Public Service Loan Forgiveness program was meant to support Americans who dedicate their careers to public service—not to subsidize organizations that violate the law, whether by harboring illegal immigrants or performing prohibited medical procedures that attempt to transition children away from their biological sex. With this new rule, the Trump Administration is refocusing the PSLF program to ensure federal benefits go to our Nation’s teachers, first responders, and civil servants who tirelessly serve their communities.”

The DOE’s statement on the final rule also stated that the rule “will only be applied prospectively.”

The states’ complaint alleges the phrase “substantial illegal purpose” does not appear in, nor is contemplated by, the PSLF statute.

“Public Service Loan Forgiveness was created as a promise to teachers, nurses, firefighters and social workers that their service to our communities would be honored,” said James in a statement. “Instead, this administration has created a political loyalty test disguised as a regulation.”

Professional organizations such as the California Medical Association have voiced concerns over the final rule’s impact on health care providers. The CMA issued a statement calling on the DOE to “preserve PSLF eligibility for all physicians serving patients in nonprofit facilities, regardless of the types of care those facilities provide.”

According to the Association of American Medical Colleges, more than 55% of medical school graduates plan to pursue PSLF.

“With the average medical student graduating with more than $200,000 in debt and a projected nationwide shortage of up to 86,000 physicians by 2036, PSLF remains an essential tool for attracting physicians to underserved communities and ensuring access to care,” the CMA wrote.

Impact of Borrowing

For student loan borrowers, including those previously and newly excluded by the PSLF program, the debt weighs heavy.

As of 2023, more than 43 million Americans—18% of adults—had outstanding student loans, with an average balance of $38,000 and an average monthly payment of $503, according to Commonwealth’s “Benefits for the Future: Intentional Employee Benefits That Support Retirement Savings for Workers Living on Low to Moderate Incomes.”

Moreover, as of March, 9.7 million student loan borrowers had become past due on their payments since the COVID-19 pandemic repayment pause ended in 2023, according to data from the Federal Reserve Bank of New York.

Those borrowers are feeling the retirement savings squeeze as well, Commonwealth research suggests.

Seventy-two percent of respondents to a 2024 survey by the nonprofit agreed that student loans had made it more difficult for them to contribute to their retirement plan. The borrowers struggling the most were disproportionately students of color, first-generation college students and students from lower-income families.

Alternatives to PSLF

Despite a mounting debt burden, a growing number of employers are offering student loan repayment assistance as a benefit to their employees. The SECURE 2.0 Act of 2022 allows employers to provide retirement contributions as a match for student loan payments, making retirement savings more attainable for those prioritizing their loan repayments.

Loan payments are treated as elective deferrals or after-tax contributions for the purposes of qualifying for employer matches to a defined contribution retirement plan.

As an example, if an employer’s policy is to match contributions dollar-for-dollar up to the first 5% of an employee’s salary, the same would apply to the loan payment match. The employer’s vesting rules for the student loan match remain the same as for the DC plan match.

Benefits to the Employer

Commonwealth’s 2024 survey suggested that, like employees, employers also stand to benefit from student loan matches.

Younger workers are more likely to both choose and stay with employers that provide financial security and stability through benefits and compensation. For instance, after Fidelity added a solution that makes student debt payments directly to a loan service provider, employers of people using the benefit saw a 26% overall reduction in turnover.

Commonwealth’s survey found 40% of respondents said student loan repayment benefits are very or extremely important to their overall employer benefit package. In a 2021 Betterment survey, 43% of student loan borrowers said they would be enticed to leave their job for a prospective employer offering a student loan repayment benefit program.