Federal government drops appeal, preserving win in major legal challenge protecting Public Service Loan Forgiveness

San Francisco, CA (October 22, 2026)—San Francisco City Attorney David Chiu and Santa Clara County Counsel Tony LoPresti issued the following statement today after the federal government abandoned its appeal in National Council of Nonprofits et al. v. McMahon, a case brought against the U.S. Department of Education by the City and County of San Francisco, the County of Santa Clara, and a broad coalition of local governments, nonprofits, and labor unions. The case stopped a new rule that would have allowed the Secretary of Education to disqualify government and nonprofit employers that disagree with the administration’s policies from a program intended to support borrowers working in public service jobs.

Earlier this year, a federal court ordered the Trump administration to stop its unlawful rewriting of the Public Service Loan Forgiveness (PSLF) program as a way of silencing local governments and nonprofit organizations that do work that runs counter to the administration’s political agenda. The government had filed an appeal of the ruling, but on Wednesday submitted a joint stipulation of dismissal, which will formally end the matter and ensure the new rule will not take effect.

“Millions of people in our country struggle under crushing student loan debt, so we’re grateful loan forgiveness will remain available to public servants who dedicated their careers to bettering our communities,” said San Francisco City Attorney David Chiu. “This victory ensures the Public Service Loan Forgiveness program is here to stay and can continue to function as Congress intended. This vital program will allow our teachers, emergency responders, public health professionals, and other public servants to build stable futures while serving their communities.”

“The federal government’s decision to drop its appeal reaffirms what we have said from the start: this was a purely political effort to impose unlawful conditions on a congressionally created program,” said Santa Clara County Counsel Tony LoPresti. “Public Service Loan Forgiveness is critical to recruiting and retaining talented public servants, and our victory in court protects the promise made to those who dedicate their careers to serving their communities.”

Background
Congress created the Public Service Loan Forgiveness program in 2007 to provide federal student loan debt relief to people working in public service in all levels of government or at a nonprofit organization. PSLF forgives the remaining balance on direct federal loans after a participant makes 120 qualifying payments while working full-time for a public service employer.

The new PSLF rule, meant to take effect July 1, 2026, would have allowed the Secretary of Education to disqualify government and nonprofit employers that disagreed with the federal administration’s policies. This would have given the administration a tool to attack sanctuary jurisdictions, immigrant rights groups, healthcare providers that offer gender affirming care, schools, colleges, universities, and employers committed to equal opportunity employment. This effort to weaponize PSLF would have had a chilling effect on the entire public service workforce and unfairly punished workers for the entirely lawful policies of their employers.

The lawsuit alleged that the new PSLF rule is not only arbitrary and capricious, but also a blatant violation of the Administrative Procedure Act and the Higher Education Act passed by Congress, which categorically provides that government and 501(c)(3) nonprofit organizations are PSLF-eligible employers. By denying debt relief to those employed at organizations the federal administration dislikes, the rule would have deprived government and nonprofit employers of highly qualified individuals to do work benefiting those in need across the country.

On June 30, 2026, U.S. District Court Judge Myong J. Joun vacated the new PSLF final rule. The court concluded, “The Final Rule is contrary to law and promulgated in excess of statutory authority, is arbitrary and capricious, and violates the First Amendment. I therefore hold it unlawful and set it aside. The Final Rule is vacated.”

In addition to San Francisco and the County of Santa Clara, the coalition of plaintiffs in the lawsuit includes the City of Albuquerque, City of Boston, City of Chicago, Amica Center for Immigrant Rights, Coalition for Humane Immigrant Rights, Legal Aid DC, National Association of Social Workers, National Council of Nonprofits, Oasis Legal Services, American Federation of Teachers, American Federation of State, County and Municipal Employees (AFSCME), and National Education Association. The coalition is represented by Democracy Forward and Protect Borrowers in this matter. The County of Santa Clara and San Francisco represent themselves.

The case is National Council of Nonprofits, et al. v. Linda McMahon, et al., U.S. District Court for the District of Massachusetts, Case No. 1:25-cv-13242. View the stipulation of dismissal.