Over 20 States Sue to Stop Rule Limiting Student Loan Forgiveness for Public Workers

A new federal rule has set off a legal firestorm after more than 20 Democratic-led states sued to stop changes that could deny student loan forgiveness to public workers if their employer is deemed to have a “substantial illegal purpose.”

The lawsuit, filed in Massachusetts, argues that the Education Department has overreached by rewriting eligibility standards for the Public Service Loan Forgiveness program. At the center of the controversy: nonprofits serving immigrants and transgender youth.

New York Attorney General Letitia James didn’t mince words, calling the rule “a political loyalty test disguised as a regulation” and “unjust and unlawful.”

Other cities and organizations including Boston, Chicago, and the National Council of Nonprofits, have filed a separate legal challenge, claiming the new rule unfairly targets certain groups.

Under Secretary of Education Nicholas Kent defended the move, saying, “This is a commonsense reform that will stop taxpayer dollars from subsidizing organizations involved in terrorism, child trafficking, and transgender procedures that are doing irreversible harm to children.” He added, “The final rule is crystal clear: the Department will enforce it neutrally.”

The rule allows the Education Secretary to determine if an employer is disqualified based on the “preponderance of the evidence,” including cases involving hormone therapy for trans youth—defined in the rule as “chemical castration.”

States argue that entire government agencies, hospitals, and schools could be affected, and that the vague language gives too much power to federal officials.

A third lawsuit is expected from legal and advocacy groups representing immigrant and LGBTQ+ communities.

Congress created the loan forgiveness program in 2007 to help public servants.