PSLF in 2026: New Rules & Tax Implications

If you are pursuing Public Service Loan Forgiveness (PSLF), the landscape has changed significantly since the 2024 transition to StudentAid.gov. With the recent passage of new federal student loan legislation and the expiration of pandemic-era tax exemptions, staying informed is critical to best understand your options.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on January 26, 2026.

The 2026 “Student Loan Tax Bomb”

The most critical update for 2026 is the expiration of the federal tax-free status for forgiven student loans.

Prior to 2026: Forgiveness was generally not taxed at the federal level, saving student loan borrowers thousands of dollars.

Now (2026): Unless Congress acts to extend the 2021 American Rescue Plan provisions, any loan balance forgiven under PSLF or IDR may be treated as taxable income.

Professor’s Note: For a borrower receiving $50,000 in forgiveness, this could result in a significant tax bill. Consult with a tax professional to prepare for a potential “tax bomb.”

The Move to Simplify Student Loans with “One-Stop Shop” Processing

The days of managing PSLF through MOHELA are over. All PSLF forms, payment tracking, and employer certifications are now managed directly by the Department of Education (ED) via StudentAid.gov.

Key Actions for Borrowers to Consider:

Check Your Dashboard: Log in to your StudentAid.gov account to view your “My Aid” section. This is now the only official source for your qualifying payment count.

Employer Recertification: Use the PSLF Help Tool to certify your employment annually. Certifications can be done digitally, saving time by avoiding “snail mail” and manual uploads. However, it has been my experience that while receiving the certification via email is quicker, sometimes it requires regular follow-up with the employer to confirm it was received and sent.

Impact of the “One Big, Beautiful Bill” (2026)

New regulations effective July 1, 2026, have streamlined repayment options but also introduced stricter eligibility for new borrowers, which even includes a cap on how much students can borrow.

Repayment Assistance Plan (RAP): This is becoming the primary income-driven plan. If you were previously on the SAVE plan, which has been phased out, ensure you have transitioned to an eligible plan to continue earning PSLF credits.

Employer Eligibility: New rules now allow the Education Secretary to bar forgiveness for employees of organizations deemed to be involved in “substantially illegal activities.” I have issues with this new criterion. Here’s why:

The Collateral Damage Clause: Your Service vs. Your Employer’s Conduct

In my opinion, perhaps the most controversial update in the 2026 PSLF regulations is the discretionary power granted to the Secretary of Education. Under the One Big Beautiful Bill Act (OBBBA), the Secretary may now disqualify an organization from being a “qualifying employer” if it is deemed to be engaged in “substantially illegal activities.”

This is a fundamental shift in how “public service” is defined. Historically, if your employer was a 501(c)(3) or a government entity, your time with that employer counted toward your 120 payments. Under the new rule:

Total Loss of Accrued Time: If an employer is disqualified, the Secretary of Education has the discretion to determine the effective date of that disqualification.

This harsh interpretation means years of your past service could be wiped out if the Department determines the “illegal purpose” was present during your tenure.

Zero Borrower Control: You could be a dedicated public defender, a nurse, or a teacher performing at the highest levels, and yet, your forgiveness would be revoked because of high-level organizational conduct, such as alleged immigration violations, financial fraud, or “public nuisance” activities, that you had no part in and knowledge of.

Looking at this from a different perspective, suppose you work in a company involved in illegal activity, and the CEO gets arrested. Now imagine being charged with crimes as well, simply because you are an employee. Is that fair? Absolutely not!

The “Vague Standard” Problem: The term “substantially illegal” is broad. While recent guidance suggests it targets specific acts like aiding/abetting federal immigration violations or terrorism, the lack of a required criminal conviction before disqualification leaves the door open for political shifts to redefine “qualified service” overnight. Again, it needs to be stressed that as an employee, you are being held accountable for the actions of the employer.

As a professor in Business Law, one of the sections I cover in the course I developed focuses on the employer-employee relationship and the issue of Respondeat Superior, where an employer could be liable for the acts of the employee, but not vice versa, which is the standard in Agency Law.

Professor’s Perspective: This creates an unprecedented “due process” issue. Borrowers are faced with the situation that, after performing ten years of service under a contract where the Government) can retroactively change the eligibility of the workplace based on a third party’s (the Employer’s) conduct.

How to Protect Yourself

Because this rule is entirely outside of your control, the only defense is proactive documentation and being vigilant to the extent possible.

Quarterly ECFs: Don’t wait a year to certify your time with the employer. Submit an Employer Certification Form (ECF) every 3 to 6 months to “lock in” as much time as possible.

Monitor Your Organization: Be aware of any high-profile litigation or federal investigations involving your employer. Any cases filed in court are public record, and you should be able to access any court filings with ease.

The “Exit” Strategy: If your organization’s status is called into question, it may be time to transfer to another 501(c)(3) entity immediately.

Summary of the Risks for Student Loan Borrowers Seeking Public Service Credits

Feature	Old Rule (Pre-2026)	New Rule (Post-July 2026)
Eligibility Basis	Tax-exempt status (501c3/Gov) under the IRS Code.	Conduct-based. Must avoid “illegal purpose.”
Borrower Risk	Minimal. The Employer must remain a nonprofit. Public Service credits are not lost retroactively.	High- Employer conduct can nullify service.
Discretion	Objective (IRS status).	Subjective- Based on the Education Secretary’s determination, which results in a “guilty by association” penalty.
Notice	Usually prospective.	Can be retroactive to the date of the “illegal act” wiping out years of service.

The Professor’s Conclusion: Navigating the 2026 Shift with Student Loans

The student loan landscape of 2026 has changed drastically. It is no longer a simple matter of “service for forgiveness” after putting in your time. There is the federal tax bomb that could cost you tens of thousands of dollars in tax liability. Employees can now be responsible for the acts of their Employer, which goes against the basic principles of Agency Law in the world of Business Law.

As we navigate these monumental changes under the One Big Beautiful Bill Act, document everything, recertify your employment quarterly, and as best as you can, be wary of your employer’s conduct.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

You can find additional categories by clicking below or by using the search feature at the top of this page:

• Bankruptcy
• Insights & Analysis

Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

This page was updated initially on November 18, 2024.