Education Department drops appeal of ruling that struck down loan forgiveness employer rule

The Department of Education has dropped its appeal of a federal court ruling that struck down a rule letting the education secretary disqualify nonprofit and government employers from Public Service Loan Forgiveness, according to a news release from the plaintiffs’ lawyers at Democracy Forward. The release, dated October 22, said the government filed a joint stipulation of dismissal on Wednesday, October 21, which the plaintiffs said formally ends the case and ensures the rule will never take effect.

The case is National Council of Nonprofits et al. v. McMahon. A federal court ruled against the Education Department in the case on June 30, 2026, according to the American Association of Colleges of Osteopathic Medicine, one day before the rule was scheduled to take effect.

What the rule said

Secretary of Education Linda McMahon issued the final rule on October 31, 2025, responding to a March 2025 executive order, the Congressional Research Service reported in an August legal analysis. The order directed that Public Service Loan Forgiveness be administered so that employees of organizations whose activities have a “substantial illegal purpose” would not be eligible.

Under the rule, an employer would have a substantial illegal purpose if it aided or abetted violations of federal immigration law, supported terrorism, carried out a pattern of aiding or abetting illegal discrimination, or had a pattern of violating state laws against trespass, public nuisance, vandalism and similar offenses, as shown by a final state court judgment. The rule listed other criteria as well, according to the Congressional Research Service.

The secretary could make a finding in one of two ways: by an employer’s failure to certify on a borrower’s application that it does not engage in the listed acts, or by an affirmative finding that it was more likely than not that the employer had engaged in them on or after July 1, 2026. A finding would have lasted 10 years unless the employer submitted a corrective action plan. After July 1, 2026, payments a borrower made while working for such an employer would not have counted toward forgiveness.

How the program works

Public Service Loan Forgiveness, created by Congress in 2007, cancels the remaining balance on federal Direct Loans after a borrower makes 120 qualifying monthly payments while working full time in a “public service job.” The law defines that term as employment in one of 18 categories, ranging from emergency management and law enforcement to work for a nonprofit organization described in Section 501(c)(3) of the tax code, according to the Congressional Research Service.

The court’s reasoning

Two federal district courts vacated the rule on June 30, the Congressional Research Service reported. It said both courts read the statute’s text as barring the “substantial illegal purpose” test. One court held that the law requires the secretary to credit payments made while working full time at any 501(c)(3) organization and gives no authority to “pick and choose” among them. The other found a clear conflict between the rule and the statute, because Congress defined qualifying jobs by broad categories and made only one exception, for time served as a member of Congress.

The Education Department had argued that the statute’s overlapping job categories and its purpose of advancing the public interest allowed the rule, and that the Internal Revenue Service’s practice of denying tax exemptions to organizations with illegal purposes offered a parallel, according to the analysis. Neither court accepted the comparison to the tax-exemption doctrine.

The appeal and the dismissal

The department appealed both judgments on August 27, the Congressional Research Service reported. Before filing the appeals, it amended the Public Service Loan Forgiveness application form to remove a June 2026 requirement that employers attest they do not have a substantial illegal purpose.

The plaintiffs in the case include the American Federation of State, County and Municipal Employees, the American Federation of Teachers, the National Education Association, the National Council of Nonprofits, the National Association of Social Workers, and the cities of Albuquerque, Boston and Chicago, according to the Democracy Forward release. Other plaintiffs named in it include the City and County of San Francisco, the County of Santa Clara, Legal Aid DC, the Amica Center for Immigrant Rights, the Coalition for Humane Immigrant Rights and Oasis Legal Services. Democracy Forward and Protect Borrowers served as counsel for the coalition.

Patrick Moran, president of the American Federation of State, County and Municipal Employees, said in the release: “Countless essential workers rely on this program, and weaponizing it for political purposes would hurt not just these workers but the communities they serve.” He added: “We’re glad the administration is now following the law and abandoning this illegal scheme.”

The Congressional Research Service reported that through April 2026 the Education Department had provided forgiveness to approximately 1.254 million borrowers, totaling $93.4 billion in student loan debt, under the program and its related programs.