The U.S. Department of Education has issued a final rule that will change how the Public Service Loan Forgiveness (PSLF) program evaluates whether a government or nonprofit employer qualifies as “public service.” Effective July 1, 2026, the rule adds a new conduct-based standard to the existing, primarily status-based employer eligibility framework.
What the Rule Does
Under the new rule, an employer that otherwise qualifies for PSLF (for example, a government entity or 501(c)(3) organization) may be deemed ineligible for PSLF if the Department of Education finds ⏤based on a preponderance of the evidence⏤ that the employer engages in repeated or systemic illegal activity. This determination focuses on patterns of conduct rather than isolated incidents.
Categories of activity that may trigger a finding of ineligibility could include:
- Repeated or systemic violations of federal or state law
- Unlawful discrimination
- Violations relating to immigration, minors, or other areas subject to specific statutory protections
- Activities that implicate federal laws regarding terrorism or related financing
Importantly, the Department emphasized that ineligibility will not be based on an organization’s mission, policy positions, or a single compliance lapse, and that it will consider the severity, frequency, and context of conduct before determining ineligibility.
Implications for Employers
For most nonprofits and public-service organizations with sound compliance practices, the rule should not affect day-to-day operations. However, it does place greater emphasis on organizational compliance practices and may have heightened implications for entities operating in sensitive or highly regulated areas such as immigration services, youth services, health care, and advocacy.
If the Department designates an employer as ineligible:
- The determination is intended to apply prospectively—employees generally would retain PSLF credit previously earned while the employer was in qualifying status.
- The employer may pursue a corrective action plan to address the underlying issues and potentially regain qualifying status sooner than the default ineligibility period.
Recommended Next Steps
In light of the new rule, employers may want to consider:
- Reviewing compliance policies and practices, particularly in areas tied to federal or state regulatory frameworks
- Coordinating with legal or compliance teams to identify any activities that may warrant closer evaluation under the new conduct standard
- Documenting compliance processes and remedial steps ahead of the 2026 effective date
- Preparing internal messaging for employees who rely on PSLF as part of their long-term compensation planning
- Monitoring future Department guidance and any pending litigation, which may further clarify how these standards will be interpreted and applied
Bottom Line
The new rule preserves the traditional status-based PSLF employer eligibility framework but introduces a new conduct-based mechanism that can disqualify an otherwise eligible employer where the Department finds a substantial illegal purpose. Nonprofit and public-sector employers may want to review the rule, confirm that internal practices align with legal requirements, remediate potential risk areas, and communicate transparently with staff as the July 2026 effective date approaches.
Lakshmi Sarma Ramani is a Partner and Practice Area Leader at OGC. Lakshmi has over 25 years of significant transactional experience and handles a range of legal matters for privately held companies and exempt organizations.