Banking and Finance Law Daily Wrap Up, LOANS—State AGs seek to vacate new Education Department loan forgiveness rule, (Nov 4, 2025)

By Colleen M. Svelnis, J.D.

Twenty-one states and the District of Columbia have filed a complaint against the Department of Education seeking to stop the Department’s final rule—which affects the Public Service Loan Forgiveness program—from taking effect.

Twenty-one states and the District of Columbia have filed a complaint in the U.S. District Court for the District of Massachusetts against the U.S. Department of Education (ED) for unlawfully restricting eligibility for the Public Service Loan Forgiveness (PSLF) program. On October 31, the U.S. Department of Education finalized a rule (90 Fed. Reg. 48966 (Oct. 31, 2025) granting itself the power to unilaterally declare entire agencies or organizations ineligible employers for Public Service Loan Forgiveness (PSLF) program if the Administration determines they have a “substantial illegal purpose.” The rule is scheduled to take effect in July 2026.

The rule defines such “illegality” to include activities that support undocumented immigrants, provide gender-affirming health care to transgender youth, promote diversity, equity, and inclusion efforts, and engage in political protest. The AGs warn that this vague new authority could have “devastating” consequences nationwide. Public workers could lose PSLF eligibility through no fault of their own. As a result, they assert, states could be faced with severe staffing shortages, higher turnover, and skyrocketing costs to maintain essential services.

The PSLF program was established by Congress in 2007 to provide debt relief to those who dedicate their careers to the service of others. The program allows government and nonprofit employees to have their federal student loans forgiven after ten years of service.

The AGs oppose the change in the final rule that would deem certain state and local governments or nonprofit organizations ineligible employers for PSLF if the federal government determines they have engaged in actions with a substantial illegal purpose—in practice, activities or actions that are disfavored by the Administration. The coalition argues that the sweeping new rule targeted to punish states and organizations that the Administration does not like. The attorneys general are asking the court to declare the rule unlawful, vacate it, and bar the Department of Education from enforcing or implementing it.

The state coalition’s argues that ED’s new rule is flatly illegal. The PSLF statute guarantees loan forgiveness for anyone who works full-time in qualifying public service; it does not grant ED discretion to carve out exceptions based on ideology. They assert that the rule’s vague “substantial illegal purpose” standard is arbitrary and capricious as it gives the Department unfettered power to target specific state policies or social programs while exempting federal agencies from scrutiny.

Massachusetts Attorney General Andrea Joy Campbell said that the PSLF program has, for decades “enabled talented, service-minded individuals to build careers helping others—with the promise that their sacrifice would be honored with loan forgiveness. By changing the rules and punishing the very people who keep our communities running, the Trump Administration has shown once again that it chooses cruel ideology over fairness and the law.”

The states of Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, Washington, Wisconsin, and the District of Columbia are plaintiffs in the case.

CRL response. In response to the final rule which limits Public Service Loan Forgiveness for student loan borrowers, eliminating promised financial relief, the Center for Responsible Lending (CRL) issued a statement calling the regulation “the latest in a long list of cruel tricks imposed on workers and groups who hold views or serve people this administration doesn’t like.” CRL stated that the restrictions “will consign millions of student borrowers to decades of unaffordable debt repayment and will worsen existing shortages of teachers, police and emergency services workers, and nonprofits who help local residents thrive and contribute to building vibrant, economically resilient communities.”

Companies: Center for Responsible Lending

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