Cities and Unions Sue Over New PSLF Restrictions

Just when we thought student loan policy couldn’t get more political, the Public Service Loan Forgiveness (PSLF) program is back in the spotlight. Four major U.S. cities (Albuquerque, Boston, Chicago, and San Francisco), along with the American Federation of Teachers (AFT) and the American Federation of State, County and Municipal Employees (AFSCME), have filed a lawsuit against the Trump administration over new rules that could significantly alter PSLF eligibility.

The lawsuit comes less than a week after the U.S. Department of Education finalized a rule establishing stricter criteria for qualifying PSLF employers, citing concerns over organizations with “a substantial illegal purpose.”

Let’s unpack what’s happening, how it could affect borrowers, and why this issue is likely headed for a lengthy legal showdown.

What’s Changing in PSLF

Under the new rule, the Department of Education (DOE) may exclude certain employers from PSLF eligibility if it determines that the organization engages in or supports activities considered “illegal” under federal law.

Specifically, the regulation:

• Defines how the DOE will determine if an employer has a “substantial illegal purpose.”
• Allows employees to retain PSLF credit up until the effective date of that determination.
• Outlines how employers can regain eligibility once the DOE deems them compliant.

The administration argues that these changes are designed to protect taxpayers by ensuring PSLF benefits don’t subsidize organizations that “undermine national security and American values through criminal activity.”

While this might sound straightforward on paper, the language is broad, leaving many to question what kinds of organizations could fall under this definition.

How It Could Affect Borrowers

At face value, the rule doesn’t change PSLF requirements for individual borrowers. You still must:

• Work full-time for a qualifying employer,
• Make 120 qualifying payments under an eligible repayment plan, and
• Have Direct Loans in good standing.

However, the real concern lies on the employer’s side. Because the DOE now has expanded authority to disqualify organizations, employees could lose PSLF eligibility through no fault of their own.

The most contentious example comes from language in a March 2025 executive order which laid the foundation for this new rule. The EO referenced “child abuse, including the chemical and surgical castration or mutilation of children” in the context of gender-affirming medical care.

This has raised alarm among healthcare providers and nonprofit hospital systems that offer gender-affirming services. If such care is deemed to fall under an “illegal purpose,” entire hospital systems, and all their employees, could theoretically lose PSLF eligibility overnight.

Why It’s Happening: The Political Backdrop

The roots of this issue go back to March 2025 when President Trump signed the executive order directing the DOE to revise PSLF rules. The order’s stated intent was to ensure that federal forgiveness programs do not indirectly support organizations involved in illegal activity.

Following the order, the DOE conducted negotiated rulemaking sessions over the summer to determine how to implement the directive. The final rule, which was largely unchanged from the executive order, was published in late October and takes effect in early 2026.

Less than a week later, on November 3, the coalition of cities and unions filed suit.

The Lawsuit: Who’s Involved and What They’re Arguing

The cities of Albuquerque, Boston, Chicago, and San Francisco, along with AFT, AFSCME, and other plaintiffs, argue that the rule is unconstitutional and overly vague. Their main claims include:

• Violation of Congressional Authority: PSLF was created by Congress, not the executive branch. Major changes to eligibility criteria should require legislative approval, not just executive.
• First Amendment Concerns: Excluding organizations based on the type of healthcare or social services they provide could constitute viewpoint discrimination.
• Arbitrary Implementation: The rule gives the DOE broad discretion without clear guidelines, making it nearly impossible for organizations or borrowers to predict how the policy will be applied.

Legal experts expect the case to move quickly through federal courts, and injunctions could temporarily halt enforcement.

What Borrowers Should Do Now

If you’re pursuing PSLF, don’t panic – and don’t make any sudden career moves. The rule has not yet been enacted, and it’s highly likely to face legal delays or revisions. For now:

1. 1. Continue certifying employment through www.studentaid.gov.
2. 2. Keep detailed records of qualifying payments and employer certifications.
3. 3. Stay informed. If your employer is affected, you’ll want to know as soon as possible.
4. 4. Consult an expert if you’re unsure how your employment could be impacted.

As history has shown, PSLF policies often shift with each administration. Even if this rule is enforced, future administrations could reverse it, potentially restoring lost eligibility.

Final Thoughts

This is a developing story that sits at the intersection of student loan policy and politics, and it’s one worth watching closely. Changes like these highlight the ongoing instability of student loan policy, and the importance of staying proactive about your repayment strategy.

At Student Loan Professor, we’re monitoring this situation, so you don’t have to. Our team is here to help you understand how evolving federal rules could impact your forgiveness timeline and to guide you through any next steps.

Need help navigating PSLF or verifying your eligibility? Schedule a consultation with one of our student loan experts today and put your mind at ease.