New Student Loan Forgiveness Rule Threatens Nonprofits, Sparks Two Lawsuits

A new rule regarding the Public Service Loan Forgiveness (PSLF) program issued by Donald Trump’s administration through the US Department of Education puts at risk the program that allows for nonprofit and public sector works to have loan balances forgiven after making 120 monthly payments. The new rule takes effect July 1, 2026.

Created by Congress in 2007, the PSLF program has provided student loan relief to over one million public sector and nonprofit worker borrowers. As of October 31, 2024, more than a million borrowers have had more than $70 billion in student debt discharged.

In essence, the new Trump administration rule creates a political ideology litmus test as to whether a nonprofit serves the public’s interest or not. Among the prohibited categories is “aiding or abetting violations of federal immigration laws,” a vague designation that could exclude plenty immigration advocacy.

Broadly speaking, the new rule gives the Secretary of Education the power to exclude organizations from being considered as qualified employers under the PSLF program. If the Secretary determines the nonprofits are involved in the rule’s list of prohibited activities, the borrowers will have to leave the PSLF program or leave their job.

In addition to the immigration provision, the rule also includes other vague categories for exclusion, namely:

…supporting terrorism or engaging in violence for the purpose of obstructing or influencing Federal Government policy, engaging in the chemical and surgical castration or mutilation of children in violation of Federal or state law, engaging in the trafficking of children to another State for purposes of emancipation from their lawful parents in violation of Federal or State law, engaging in a pattern of aiding and abetting illegal discrimination, and engaging in a pattern of violating State laws.

Not an Isolated Action

The PSLF rule should not, however, be viewed in isolation. The Trump administration has long had its sights set on the disruption of nonprofits.

The new Trump administration rule creates a political ideology litmus test as to whether a nonprofit serves the public’s interest or not.

In 2024, shortly after Trump’s election but before he had taken office, Congress attempted to pass bill HR. 9495, which would have allowed the Secretary of the Treasury to unilaterally declare a nonprofit a terrorist-supporting organization. The bill passed the US House of Representatives but died in the then-Democratic-controlled US Senate.

In September, Trump issued the “Countering Domestic Terrorism and Organized Political Violence” memorandum, leading over 3,000 nonprofits to sign an open letter condemning the directive, assailing the administration memo as a violation of free speech and civic engagement.

Even more recently, Congress last week held a hearing, titled “Politically Violent Attacks: A Threat to Our Constitutional Order” on a bill championed by Senator Ted Cruz (R-TX) that would allow the US Department of Justice and law enforcement authorities to pursue RICO—Racketeer Influenced and Corrupt Organizations Act—against organizations that “support” protests and “rioting.”

Civil Society Responds

The reaction of nonprofits and state governments has been swift in coming—with both nonprofits and state attorneys general filing suit on Monday, November 3.

In the first suit, led by the National Council of Nonprofits—and joined by city governments of Boston, Albuquerque, Chicago, and San Francisco, the county government of Santa Clara, CA—immigrant rights organizations, legal aid nonprofits, unions, and the National Association of Social Workers—the plaintiffs charge the Trump administration with targeting “organizations and jurisdictions whose missions and policies do not align with its political positions on immigration, race, gender, free speech, and public protest.”

Many of the plaintiffs in that suit have issued statements that can be found here. Vanesa Martinez-Chacon, a staff attorney at the Amica Center for Immigrant Rights, said in her statement, “As the daughter of a single mother and immigrant family, PSLF is the reason why this goal was a realistic option for me. As an attorney at a non-profit, I provide legal services to indigent clients, and PSLF makes it financially feasible for me to continue doing this work for the long term. Without PSLF, I would have to choose between doing this vital work and providing financial support for my family.”

Diane Yentel, president and CEO of the National Council of Nonprofits, wrote on her LinkedIn page that “if implemented, these changes would exclude certain nonprofits based on their mission or the communities they serve, undermining the core purpose and effectiveness of the program and harming nonprofit workers across the country.”

The PSLF rule should not…be viewed in isolation. The Trump administration has long had its sights set on the disruption of nonprofits.

In their suit, these group seek to have the rule declared unlawful and unconstitutional for lack of due process and to permanently enjoin the Trump administration from implementing or enforcing it. The coalition wants to preserve the PSLF as Congress originally designed it, as “a bipartisan promise to those who choose to serve their communities, regardless of politics.”

The second lawsuit—filed by 21 state attorneys generals (AZ, CA, CO, CT, DE, HI, IL, MA, MD, ME, MI, MN, NJ, NM, NV, NY, OR, RI, VT, WA, WI) and the attorney general of the District of Columbia—similarly charge that the extensive new rule is “unlawful, politically motivated, and targeted to punish states and organizations that the administration does not like.”

“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 New York’s Attorney General Letitia James in a statement, accusing the Department of Education of “weaponizing” the PSLF.

She added, “This administration has created a political loyalty test disguised as a regulation. It is unjust and unlawful to cut off loan forgiveness for hardworking Americans based on ideology. I will not let our federal government punish New York’s public servants for doing their jobs or standing up for our values.”

The attorneys general warn that “entire classes of public workers, such as teachers in states with inclusive curricula, health professionals providing gender-affirming care, or legal aid attorneys representing immigrants, could suddenly lose PSLF eligibility through no fault of their own. The result would be widespread confusion, fear, and instability in the public workforce, forcing states to confront severe staffing shortages, higher turnover, and skyrocketing costs to maintain essential services.”

What’s Next?

Both legal complaints by the state attorneys general and the Council of Nonprofits and its allies were filed in the federal District Court for the district of Massachusetts. The state attorney generals, in their filings, labeled the administration’s action “arbitrary and capricious” and dispute the US Department of Education’s legal authority to carve out exceptions to the PSLF program solely based on ideology.

In a statement, the National Council further described their challenge as a “comprehensive legal challenge to ED’s PSLF rule [which] would protect Americans whose livelihoods and rights are vulnerable under the new rule.”

There could be more lawsuits: Politico reported that Aaron Ament, president of Student Defense, a nonprofit focused on legal advocacy around higher education policy, said a number of organizations are planning to file their own lawsuit in the US District Court for the District of Columbia. [Update: A suit in which plaintiffs are represented by Student Defense and Public Citizen was filed on November 4].

It will take time to see how the courts rule. It’s also clear that litigation alone is unlikely to be sufficient. As noted before, advocacy will be critical in protecting the nation’s commitment to workers who have committed their careers to the nonprofit and public sectors.