HR leaders put real dollar figures behind the case against the rule
A federal court struck down a rule letting the Education Department disqualify nonprofits from the loan forgiveness program over a "substantial illegal purpose."
The US District Court for the District of Columbia ruled on June 30, 2026, that Education Secretary Linda McMahon exceeded her statutory authority when she rewrote eligibility rules for the Public Service Loan Forgiveness program, known as PSLF. The court vacated the rule entirely, granting summary judgment to four nonprofit employers that sued over its compliance demands.
PSLF forgives federal student loans for borrowers who spend ten years working full-time in public service jobs, including jobs at any 501(c)(3) nonprofit. Following a March 2025 executive order, the department finalized a rule in October 2025 that would have let the Secretary strip a nonprofit's status as a "qualifying employer" whenever she determined the organization had engaged in a "substantial illegal purpose." The rule defined that term broadly, covering conduct such as "aiding or abetting" federal immigration law violations and "engaging in a pattern of aiding and abetting illegal discrimination."
Under the rule, employers would have had to certify that they had not engaged in any of that conduct. If an employer skipped the certification, the Secretary could determine the organization was disqualified by default. A disqualified employer would have lost qualifying status for a decade, or until the Secretary approved a "corrective action plan."
Four organizations challenged the rule: the Robert F. Kennedy Center for Justice and Human Rights, the American Immigration Council, the League of United Latin American Citizens Institute, and The Door - A Center of Alternatives. Their case leaned heavily on what the rule meant day to day for compliance and HR teams. HR and program leaders at each organization filed sworn declarations laying out concrete cost estimates: one HR director put the price tag at $10,000 to $20,000, largely for outside counsel to review programs; a managing director at a second organization estimated $20,000 to $26,000; a chief executive at a third put the figure at $4,000 to $6,000; and a chief executive at a fourth expected roughly $70,000 a year in added costs.
The court found those projected costs were enough to give the nonprofits legal standing to sue, since the rule forced them into new obligations - and new spending - they would not otherwise face. On the merits, the court ruled the regulation contradicted the plain language of the Higher Education Act, which directs the Secretary to forgive loans for borrowers working full-time at any 501(c)(3) organization, without carving out room for the Secretary to exclude specific nonprofits based on their activities. Because Congress never delegated that discretion to the Secretary, the court held the rule exceeded her statutory authority under the Administrative Procedure Act.
The court said it did not need to reach the plaintiffs' separate claims that the rule was unconstitutionally vague or suppressed protected speech, since the statutory-authority finding was enough on its own to vacate the rule.
The court granted summary judgment for the nonprofits, denied the government's cross-motion, and vacated the rule outright, rejecting the government's request to limit any relief to the parties in the case.
For HR and benefits professionals at nonprofits and other 501(c)(3) employers, the practical effect is that the certification requirement set to take effect July 1, 2026 will not go into effect as written. Organizations that had already begun compliance reviews, hired outside counsel, or built new certification processes to prepare for the rule can stand those efforts down for now, unless the ruling is stayed pending appeal or overturned on appeal. The opinion does not indicate whether the government intends to appeal.
