Hamill: Public service loan forgiveness faces new threats

Let me begin with some fatherly advice. Not to you. This is advice I gave to my four daughters.

I encouraged them to pursue careers that they would find both meaningful and challenging. Without regard to financial reward.

Many people do not feel that they can make such a choice. Student loan debt to pursue that career can seem overwhelming.

To try to help my daughters, I paid for their college education. Each earned a bachelor’s and a master’s degree.

Not everyone can, or wants to, allow their children to graduate from college with no student debt.

In 2007, Congress passed a law, signed by former President George W. Bush, that offered student debt relief to those who entered public service.

The Public Service Loan Forgiveness, or PSLF, program asks participants to make 10 years of loan payments.

If the participant also works for at least 10 years in the public sector, the government will forgive any remaining student debt.

The tax law provides that the loan relief does not create taxable income.

This law has been in place for 18 years. It encourages — and rewards — those who choose to serve the public interest.

Only service for a qualifying employer will count toward 10 years of public service.

The tax law has a means to determine which employers serve the public interest. This purpose is a requirement to be a Section 501(3) tax-exempt organization.

I have recently written about laws and regulations because a Supreme Court decision, Loper Bright Enterprises, has created a great deal of uncertainty in tax law.

Loper Bright reversed a 40-year precedent of the Supreme Court that called for courts to defer to regulations.

To qualify for this deference, the court said the law must be unclear and the regulation must be a reasonable interpretation of the law.

In Loper Bright, the court instead said that interpretations of the law are the purview of the courts, not a regulatory agency.

This decision was cheered by those who have criticized the growing body of regulations that various federal agencies have promulgated.

President Donald Trump has been a particularly harsh critic of regulations. He has called for the widespread elimination of regulations.

In my past writings on this issue, I noted that tax advisers often like regulations. The tax laws are often unclear.

Tax regulations are generally fair to taxpayers, and they offer interpretations that tax advisers can rely upon in advising clients and filing tax returns.

On March 7, Trump issued Executive Order 14235 directing the Education Department to revise the requirements for employment to satisfy the PSLF program.

The Department of Education recently released final regulations to implement the president’s executive order. The regulations are effective July 1, 2026.

This is quite unusual. First, the regulations were issued in final form with amazing haste, at least for regulations.

Second, the regulations will be administered by the Education Department, which is being systematically broken down piece by piece.

Third, the regulations base their authority on a tax principle of questionable merit, one called the “illegality doctrine.”

The regulations attack the eligibility of certain organizations as employers in the PSLF program.

If denied eligibility, working for the organization will not count for the 10 years of service to qualify for loan forgiveness.

Section 501(3) organizations qualify for tax-exempt status because they are organized and operated for the public interest.

The new regulations seek to classify the purpose of certain such organizations’ activities as having a “substantial illegal purpose.”

The Education Department secretary is charged with determining if the organization has a substantial illegal purpose.

Generally, the standard used is a “preponderance of the evidence.” Adverse determinations can be challenged (at great time and expense).

But if the Education Department determines that the illegal purpose exists by “conclusive evidence,” the employer cannot challenge the determination.

Bad activities include aiding or abetting violations of immigration law, and supporting terrorism, including by facilitating funding of designated terrorist organizations.

What is aiding violations of immigration law? Relief activities of the Catholic, Lutheran or United Methodist churches (and others)?

Also prohibited is aiding or abetting “illegal discrimination.” Organizations should check that their “discrimination” is legal.

The regulations create 12 new definitions of bad activities. None of these definitions is in the PSLF enacting legislation.

Curious that the Education Department will redefine the purpose of organizations with a tax exemption under a tax code statute.

Curiouser still that the anti-regulation administration supports such sweeping regulations. Will the Supreme Court accept this after Loper Bright?