WASHINGTON, D.C. — The U.S. Treasury Department and the IRS issued proposed regulations on September 4, 2026, to end federal tax-exempt status for private schools that use race to influence admissions or student aid. The proposed rule would strip private schools and colleges of their tax-exempt status if they provide targeted help to students based on their race.

The Treasury Department and IRS estimate that up to 18,000 private schools, colleges, and other education institutions could be affected by the proposal. The regulations, if finalized, would apply to taxable years beginning on or after May 31, 2027. The rule specifically states that benefits in admissions, scholarships, and facilities based on race "would be incompatible" with the regulation.

Treasury Secretary Scott Bessent stated, "Today's Treasury and IRS proposed regulations establish a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status." Bessent added, "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature." IRS Chief Executive Officer Frank J. Bisignano stated, "Today's proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status."

The proposed rule would apply to private primary and secondary schools, colleges, universities, professional schools, and trade schools. The proposed rule would not apply to religious institutions or affect race-neutral criteria such as family income, individual hardship, military family status, or academic achievement. The Justice Department has opened investigations into several medical schools it accuses of favoring Black and Hispanic students in admissions. Mike Gavin, Alliance for Higher Education president and CEO, stated, "The administration's latest rules changes are its most blatant attack to keep working class Americans and people of color from accessing higher education and a better life." Gavin added, "By claiming that efforts to increase fair opportunity for all students are discriminatory, the administration is trying to gaslight the American people into believing that up is down and black is white." Tim Powers, a vice president of the National Association of Independent Colleges and Universities, stated, "Our institutions are committed to complying with applicable civil rights laws and maintaining safe and supportive campuses free from discrimination." Powers added, "However, the proposed rule may create new compliance burdens and legal uncertainties for institutions of higher education that are already operating in line with existing nondiscrimination rules."

Jamie Beaton, co-founder and CEO of Crimson Education, stated, "Large domestic donations from U.S. citizens would fall meaningfully with these proposed tax changes." Marjorie Hass, president of the Council of Independent Colleges, stated that the change would most likely impact donations, which are often earmarked for scholarships. Joe Rosenberg, a senior fellow with the Urban-Brookings Tax Policy Center, stated that losing 501(c)(3) status "would by and large remove deductibility [of taxpayer contributions] to those organizations." Steven Bloom, assistant vice president of government relations at the American Council on Education, stated, "I think it will have a chilling effect on the behavior of folks on campus." Todd Wolfson, president of the American Association of University Professors, stated, "Weaponizing the IRS to attack colleges and universities that uphold and expand civil rights is outrageous." Denise Forte, president and CEO of EdTrust, stated, "Addressing racial inequity is not discrimination." Forte added, "Students of color continue to face real and persistent barriers to accessing educational opportunities." Preston Cooper, a senior fellow at the American Enterprise Institute, stated that both political parties have long viewed nonprofit status as requiring "a really high bar to mess with."

Why It Matters

The proposal affects up to 18,000 private education institutions and establishes a regulatory standard that ties tax-exempt status to race-neutral admissions and aid practices. The regulations define race-based benefits in admissions, scholarships, and facilities as incompatible with tax-exempt status, while explicitly excluding religious institutions and race-neutral criteria such as family income or academic achievement.

The financial implications center on donor deductibility, which experts state would be removed for organizations losing 501(c)(3) status. This change occurs as U.S. individual giving to educational institutions rose more than 11% in 2025, and as scores of universities have already rebranded or shut down diversity, equity, and inclusion offices under pressure from the White House. The move follows prior federal actions, including investigations into medical school admissions and demands for funds from UCLA over similar allegations.

Timeline

Bob Jones University regained its tax-exempt status in 2017 after ending the ban on interracial dating and marriage. About 12 million tax returns itemized their deductions in tax year 2024, about 8.5% of returns that year, according to IRS data. USC closed its freestanding diversity office website and folded it into a culture team within weeks of a Feb.

14, 2025, Education Department letter threatening schools’ funding over race-related programs. UC regents ended a requirement that faculty applicants submit diversity statements in March 2025. President Trump threatened to cut Harvard University's tax-exempt benefit last year. U.S. individual giving to educational institutions rose more than 11% in 2025 from the previous year, according to Giving USA's annual report released in June. A private foundation rebranded the Black Alumni Scholarship Fund at UC San Diego to make it open to students of any race in October after a right-leaning nonprofit sued over it.

What's New

Denise Forte stated, "Students of color continue to face real and persistent barriers to accessing educational opportunities." In California, the proposed changes would cover more than 85 nonprofit colleges and universities that belong to the Association of Independent California Colleges and Universities.