PSLF Rules Change July 1, 2026: New "Substantial Illegal Purpose" Test Could Disqualify Your Employer

The U.S. Department of Education's final Public Service Loan Forgiveness rule takes effect July 1, 2026. Two days from today. Introducing a "substantial illegal purpose" test that lets the Secretary strip PSLF eligibility from nonprofit and government employers. Published in the Federal Register on October 31, 2025, the rule also aligns with the Repayment Assistance Plan (RAP) enrollment window opening the same day. For borrowers chasing PSLF, the PSLF rule changes July 2026 will reshape which employers count, which repayment plan qualifies, and how much you pay each month. Twenty-one state attorneys general and several nonprofit coalitions have sued to block enforcement, but as of this morning the July 1 date still stands.

What the "substantial illegal purpose" test actually does

Under the final rule, the Secretary can determine. By a preponderance of the evidence and after notice. That a qualifying employer has engaged in conduct amounting to a "substantial illegal purpose." Enumerated categories include aiding violations of federal immigration law, supporting terrorism or political violence, certain medical procedures on minors in violation of law, trafficking children across state lines for emancipation, aiding illegal discrimination, and a pattern of state-law violations. Only conduct on or after July 1, 2026 counts. A disqualified employer loses PSLF status for 10 years, though ED may accept a corrective action plan. The Department estimates fewer than 10 employers per year will be flagged.

Why the PSLF rule changes July 2026 matter for borrowers

Here is the sharp edge for grads: if your employer is later declared ineligible, payments already made still count up to ED's formal determination date. But future months do not. Borrowers cannot request reconsideration on their own; only the employer can appeal. That leaves you dependent on your hospital, city agency, legal aid clinic, or nonprofit to fight for its status. ED has also added a perjury attestation to PSLF certification forms, meaning employers now sign under penalty of perjury that they lack a substantial illegal purpose. Expect risk-averse HR offices to slow-walk certifications this summer.

RAP: the new plan you may be forced into

The Repayment Assistance Plan opens for enrollment July 1, 2026 and is a qualifying PSLF plan. RAP payments equal 1% to 10% of your adjusted gross income, stepping up by one point per $10,000 of AGI. If you earn $10,000 or less, you pay a $10 monthly floor. At $101,000 with no dependents, expect roughly $842 per month. Each dependent shaves $50 off the bill. Parent PLUS loans and consolidations containing a Parent PLUS are not eligible. PSLF forgiveness still arrives after 120 qualifying payments, but the old SAVE plan is being wound down, and borrowers on SAVE forbearance will need RAP or a modified IBR option to keep the PSLF clock ticking.

What to do in the next 72 hours

Three moves before July 1. First, submit a PSLF Employment Certification Form covering every month through June 30, 2026. This locks in credit under the old rules and shields you from later disqualification for pre-July conduct. Second, check your plan status at StudentAid.gov: if you are parked on SAVE forbearance, those months are not counting toward PSLF, so switch to RAP or IBR once RAP opens. Third, read your employer's public statements. Universities, health systems, and legal nonprofits already flagged by advocacy litigation are the ones most likely to face a Secretary review.

The legal fight is not over

Lawsuits from a 21-state coalition, a nonprofit coalition, and a group of cities and unions are all pending. Any could produce a preliminary injunction that pauses enforcement past July 1, but none had been granted as of this morning's docket check. Members of Congress, led by Rep. Scott Peters, have also introduced a resolution to undo the rule under the Congressional Review Act. For now, plan as if the rule is live and adjust if a court intervenes.

Key Takeaways

• The PSLF rule changes July 2026 add a "substantial illegal purpose" test letting ED disqualify employers for 10 years.
• Only conduct on or after July 1, 2026 counts, and ED expects fewer than 10 disqualifications per year.
• Payments made before an employer is formally ruled ineligible still count toward the 120 needed for PSLF.
• RAP opens July 1, 2026 with payments at 1% to 10% of AGI, a $10 minimum, and $50-per-dependent reductions.
• Submit an Employment Certification Form now to lock in every PSLF-credited month under the pre-July rules.

What's Next

Watch federal court dockets in the coming days for any injunction ruling from the 21-state challenge or the nonprofit coalition suit; a decision could land within the first two weeks of July. StudentAid.gov will publish updated PSLF and RAP forms on July 1, and ED has said it will issue additional guidance on the reconsideration process for flagged employers before the end of Q3 2026. If you are within 24 months of your 120th qualifying payment, check your servicer inbox weekly through fall 2026. Most implementation glitches show up in the first billing cycle after a rule change.