A group of nearly two dozen state attorneys general have filed a lawsuit against the Department of Education over the future of a student loan forgiveness program for individuals who go into teaching or other forms of public service.
The background: The coalition of 22 attorneys general said an October 31 rule from the Department of Education would let the federal government label entire state or local agencies and nonprofits as ineligible employers under Public Service Loan Forgiveness if they are deemed to have a “substantial illegal purpose.” The rule is slated to take effect in July 2026.
- Prosecutors argue Congress created the PSLF in 2007 to reward full-time public service with forgiveness after 10 years of qualifying payments, and that the statute does not authorize agency-level carveouts.
- Several states highlighted workforce impacts if categories of employers suddenly lose PSLF eligibility, citing expected recruiting and retention challenges for teachers, nurses, law enforcement, and legal-aid staff.
The claims: The states contend the Department “exceeds its statutory authority” and acts in an “arbitrary and capricious” manner by importing a novel “substantial illegal purpose” test that does not appear in the PSLF law. They also assert the standard is vague, invites viewpoint discrimination, and would allow PSLF to be conditioned on an administration’s policy preferences while exempting federal agencies from the same scrutiny. The suit asks the court to declare the rule unlawful, vacate it, and bar enforcement.
Why it matters:
- Servicer operations and call centers that support PSLF could see a surge in disputes and employer-eligibility determinations if the rule moves forward, raising QA and documentation burdens.
- State and municipal clients may face higher turnover that complicates payroll certifications, repayment plan counseling, and recertification workflows.
- Lenders and fintechs with public-sector borrower populations should monitor for payment-behavior volatility if employees fear losing expected forgiveness and adjust hardship and outreach strategies accordingly.
Notable language: The complaint characterizes the rule as a political “loyalty test” in practice, arguing that it empowers the Department to target state policies on issues such as immigration services, gender-affirming care, DEI programs, or protest-related activity by branding them “substantially illegal,” thereby cutting off PSLF for affected workers.
What’s next: The states are seeking preliminary and permanent relief to block implementation while the case proceeds.
