The Trump administration is escalating its campaign against diversity, equity and inclusion policies in education. It proposes a regulation that could threaten the federal tax-exempt status of private schools and colleges that use race-based policies.
The U.S. Treasury Department and Internal Revenue Service announced the proposal Thursday. They said private educational institutions that discriminate on the basis of race, color or national or ethnic origin could lose their tax-exempt status under Section 501(c)(3) of the tax code.
If finalized, the rules would apply to tax years beginning after May 31, 2027. Treasury and the IRS estimate that as many as 18,000 private educational institutions could potentially be affected.
Admissions, Scholarships and Other Programs Could Be Affected
The proposed regulations would apply broadly to policies involving admissions, scholarships, loans, athletics and other programs. These programs are administered or supported by private schools.
Treasury officials argue that institutions cannot use race-based preferences under the banner of diversity or inclusion. At the same time, they say these preferences do not comply with federal nondiscrimination requirements.
Treasury Secretary Scott Bessent said that changing the terminology used to describe race-based policies would not change their legal character.
The proposal follows the administration’s broader effort to eliminate policies it considers discriminatory. In addition, it seeks to restore what it describes as merit-based opportunities in education.
New Rule Could Affect Thousands of Institutions
The proposal would apply to private primary and secondary schools as well as colleges, universities, professional schools and trade schools.
The government says schools would still be permitted to assist disadvantaged students through race-neutral criteria. Those criteria could include family income, geographic location, first-generation college status, individual hardship, military-family status or academic achievement.
That distinction could allow institutions to continue targeting financial and educational assistance toward students facing economic or other disadvantages. However, this is only permitted if race is not used as the basis for determining eligibility.
Supreme Court Rulings Provide Legal Foundation for Proposal
Treasury and the IRS say the proposed regulations are based on longstanding federal policy against racial discrimination in education. They also cite more recent Supreme Court decisions.
The agencies specifically point to Students for Fair Admissions v. Harvard, the 2023 Supreme Court decision that rejected race-based admissions policies at Harvard and the University of North Carolina.
The proposal also invokes the Supreme Court’s earlier decision involving Bob Jones University. In that case, the court upheld the government’s decision to deny tax-exempt status to a university whose policies included a ban on interracial dating and marriage.
Losing Tax-Exempt Status Could Have Major Financial Consequences
Tax-exempt status is particularly important for private educational institutions because it affects their federal tax obligations. It also impacts the treatment of charitable donations.
Universities and other nonprofit schools can receive substantial financial support from donors who benefit from tax deductions. Losing their exemption could therefore create significant financial and fundraising consequences, even beyond the direct tax liability.
The proposal represents an unusual use of federal tax policy to pressure educational institutions over their policies. The Bob Jones University case remains one of the most prominent historical examples of the government removing a school’s tax exemption over discriminatory practices.
Schools Have Until November to Comment
The regulation is currently only a proposal and has not yet become final.
The Federal Register gives the public until Nov. 3, 2026, to submit comments on the proposed rule. If finalized, the new requirements would apply to taxable years beginning after May 31, 2027.
The proposal is likely to generate significant debate among colleges, civil rights organizations and education leaders. In particular, there will be debate over how federal authorities define prohibited race-based policies and how the rules would be enforced.
For private schools and colleges, the coming months could determine whether they need to revise admissions, scholarship and other programs. This may be necessary so that they comply with a significantly stricter federal approach to race-conscious policies.
