DOE Finalizes Regulations on ‘Illegal Activities’ Causing Ineligibility for Public Service Loan Forgiveness

The US Department of Education (Education) published final regulations on October 31, 2025, implementing the March 7 executive order “Restoring Public Service Loan Forgiveness,” which directed Education to propose revisions to the public service loan forgiveness (PSLF) regulations to “ensure the definition of ‘public service’ excludes organizations that engage in activities that have a substantial illegal purpose.” The proposed regulations were published in August—garnering nearly 14,000 comments—and were generally finalized without substantive changes.

The final regulations [1] (90 FR 48966) “exclude organizations engaged in specific enumerated activities such that they have a substantial illegal purpose from being considered qualifying employers under” the PSLF program by (1) amending the definition of “qualifying employer,” (2) defining “substantial illegal purpose,” and (3) adding a standard by which Education may determine by a preponderance of the evidence (after notice and opportunity to respond, i.e., the employer reconsideration process) that a qualifying employer has engaged in illegal activities such that it has a substantial illegal purpose by considering the materiality of “illegal activities or actions” as newly defined in the regulations.

ILLEGALITY DOCTRINE

In the preamble to the regulations, Education states that the illegality doctrine utilized by the Internal Revenue Service (IRS) served as a basis for Education to promulgate regulations to exclude organizations that have engaged in certain illegal activities from the definition of qualifying employers and that “under the illegality doctrine, courts and the IRS have established that revocation of statutory benefits to organizations engaged in illegal activities is proper if its purposes and activities are illegal or otherwise contrary to public policy.” [2]

20 USC § 1087e(m)(3)(B) defines public service job categories (i.e., qualifying employers for purposes of the PSLF program) and includes organizations described in Section 501(c)(3) of the Internal Revenue Code.

Education states in the preamble that, “just like all executive branch agencies, the IRS has resource constraints that limit its ability to act against organizations under the illegality doctrine and must exercise some degree of prosecutorial discretion. This means that, at least at times, the illegality doctrine will be underenforced. In other words, there may be instances where some organizations that have a substantial illegal purpose continue to have IRS tax-exempt status.”

SUBSTANTIAL ILLEGAL PURPOSES

The regulations define the following activities as indicative of a “substantial illegal purpose”:

• Aiding or abetting violations of 8 USC § 1325 or other federal immigration laws
• Supporting terrorism, including by facilitating funding to, or the operations of, cartels designated as Foreign Terrorist Organizations consistent with 8 USC § 1189 or by engaging in violence for the purpose of obstructing or influencing federal government policy
• The use of puberty blockers, including GnRH agonists and other interventions, to delay the onset or progression of normally timed puberty in an individual who does not identify as their sex, for children in violation of federal or state law
• The use of sex hormones, such as androgen blockers, estrogen, progesterone, or testosterone, to align an individual’s physical appearance with an identity that differs from their sex, for 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
• Engaging in a pattern of violating state laws, which is defined as a final, non-default judgment by a state court of (1) trespassing, (2) disorderly conduct, (3) public nuisance; (4) vandalism, or (5) obstruction of highways

DETERMINING IF A QUALIFYING EMPLOYER HAS A SUBSTANTIAL ILLEGAL PURPOSE

The preamble explains the standard for employer disqualification, which requires Education to find that an employer has a substantial illegal purpose by a preponderance of the evidence after weighing the employer’s illegal conduct, narrowly focusing on only the illegal conduct enumerated in the regulation. Importantly, it notes that a determination by Education regarding illegality only represents Education’s conclusion that the organization is not a qualifying employer for purposes of participation in the PSLF program and does not represent a determination by the IRS regarding the organization’s tax-exempt status.

Education will determine that a qualifying employer violated the applicable standard when (1) Education receives an application in which the employer fails to certify that it did not participate in activities that have a substantial illegal purpose or (2) Education otherwise determines that the qualifying employer engaged in such activities, unless Education approves a corrective action plan signed by the employer.

The regulations establish an employer reconsideration process that gives employers the right to submit additional information and seek review of determinations. Education explains in the preamble that the employer reconsideration process “provides due process to ensure that [Education] considers all relevant information prior to taking action to remove employer eligibility” and that employers will be given an opportunity to respond except in cases where there is conclusive evidence that the employer engages in activities such that it has a substantial illegal purpose.

Education will presume that any of the following is such conclusive evidence:

• A final judgment by a state or federal court, whereby the employer is found to have engaged in illegal activities that have a substantial illegal purpose;
• A plea of guilty or nolo contendere, whereby the employer admits to having engaged in illegal activities that have a substantial illegal purpose or pleads nolo contendere to allegations that the employer engaged in illegal activities that have substantial illegal purpose; or
• A settlement that includes admission by the employer that it engaged in illegal activities that have a substantial illegal purpose.

The regulation provides that nothing in the determination process shall be construed to authorize Education to determine an employer has a substantial illegal purpose based upon the employer or its employees exercising their First Amendment protected rights or any other rights protected under the Constitution.

In the preamble, Education recognizes that “even without such explicit references, [the regulation could not] be enforced in a manner that contravenes the First Amendment” and that “[l]awful activity will not disqualify an organization, no matter how controversial or unpopular it may be.”

TIMING AND IMPACT ON EMPLOYEE-BORROWERS

The effective date of the new regulations is July 1, 2026. For borrowers, the regulations will remove PSLF eligibility for individual borrowers during periods of employment by organizations that do not qualify under the revised criteria.

Where an employer is deemed to have engaged in activities that breach federal or state law, affected borrowers will no longer receive credit toward loan forgiveness for the months worked after the determination date of ineligibility. However, borrowers will receive full credit for work performed until the effective date of Education’s determination that they are no longer a qualifying employer for purposes of the PSLF program.

EMPLOYEE-BORROWER NOTICE AND RECONSIDERATION

The regulations require Education to notify borrowers of a qualifying employer’s status if the qualifying employer is at risk of becoming or becomes ineligible to participate in the PSLF program. A borrower may not request reconsideration of a determination by Education that resulted in the employer losing status as a qualifying employer because the employer has a substantial illegal purpose.

REGAINING PSLF ELIGIBILITY

An employer that loses PSLF eligibility and desires to regain eligibility can regain qualifying employer status either 10 years from the date Education determines it has a substantial illegal purpose or when Education approves a corrective action plan signed by the employer.

Associate Chai Jindasurat co-authored this LawFlash