September 3, 2026
The Trump administration is moving to use one of the federal tax code's most powerful financial incentives to pressure private schools and colleges over how they use race in admissions, scholarships, financial aid and other programs.
The Treasury Department and Internal Revenue Service are proposing rules that could strip tax-exempt status from private educational institutions that provide benefits or opportunities based on race. The proposal represents a significant escalation of President Donald Trump's campaign against diversity, equity and inclusion programs in American education.
If finalized, the policy could affect thousands of private educational institutions and potentially reshape how schools design scholarships, admissions practices and student-support programs.
The administration argues that treating students differently because of race amounts to unlawful discrimination, even when schools describe those policies as efforts to promote diversity or address historical disadvantages.
Critics, however, warn that removing tax-exempt status could put enormous financial pressure on schools and could discourage programs intended to expand opportunities for historically disadvantaged students.
How the Proposed Tax Rule Would Work
The proposal centers on the tax-exempt status available to organizations under Section 501(c)(3) of the federal tax code.
Tax-exempt organizations generally do not pay federal income tax on qualifying income, and donations to them can receive favorable tax treatment. For private schools, the status can therefore have significant financial consequences.
Under the administration's proposed approach, schools that intentionally discriminate based on race could potentially lose that status.
The policy would not be limited simply to college admissions. The proposed rules could reach race-based preferences involving scholarships, financial assistance, loans, access to facilities and other educational programs.
The Treasury Department has argued that schools should not be able to avoid the consequences of racial preferences merely by describing such programs using DEI terminology.
Treasury Secretary Scott Bessent has emphasized the administration's position that race-based benefits remain discriminatory regardless of the label attached to them.
Why Private Schools Are Being Targeted
The administration's strategy is part of a broader effort to eliminate racial preferences from American education.
Trump and his administration have repeatedly argued that programs designed to increase racial diversity can themselves create discrimination by giving an advantage to some racial groups over others.
That position gained momentum after the Supreme Court's 2023 decision involving Harvard University and the University of North Carolina. The court ruled that the universities' admissions systems unlawfully used race as a factor in admissions.
The ruling dramatically changed the legal environment surrounding affirmative action.
However, the Supreme Court decision did not simply declare every consideration of a student's background illegal. It left room for applicants to discuss how race affected their individual experiences, provided that admissions decisions were not based on racial preferences themselves.
The Trump administration has sought to go considerably further by demanding that colleges demonstrate that they are not using race in prohibited ways.
A New Financial Weapon in the DEI Fight
The proposed tax rule is important because it gives the federal government another mechanism for influencing schools.
The administration has already used federal funding, civil-rights enforcement and executive actions to challenge DEI policies.
Tax-exempt status provides a different type of leverage.
Rather than simply threatening to remove federal education grants, the government could potentially challenge an institution's eligibility for a tax benefit that affects its overall financial structure.
For schools that depend heavily on charitable donations, losing tax-exempt status could be particularly painful.
Donors may become less willing to contribute if their gifts no longer receive the same tax treatment. Schools could also face increased tax liabilities and greater difficulty raising money for scholarships, facilities and educational programs.
That makes the proposal potentially consequential even for institutions that receive relatively little direct federal funding.
The Rule Could Affect Thousands of Institutions
The administration's proposal could reach a remarkably broad group of educational institutions.
Reporting indicates that as many as 18,000 schools and colleges could potentially fall within the scope of the new policy.
The affected institutions could include private colleges, universities, independent schools and other nonprofit educational organizations.
The proposal would not necessarily mean that every institution would immediately lose its tax exemption.
Instead, the rule would establish standards under which the IRS could determine that an institution is violating federal policy against racial discrimination.
That distinction is important because schools would have opportunities to change their policies, contest government findings or challenge enforcement actions in court.
Religious Schools Could Receive an Exemption
The proposed approach does not treat every educational institution identically.
Religious organizations are expected to receive protection under the proposal, reflecting longstanding legal considerations surrounding religious institutions and federal regulation.
That could create complicated questions for religious schools that also operate race-conscious scholarship programs or other initiatives.
The precise boundaries of the exemption and how the IRS would enforce the rules are likely to become major issues during the regulatory process.
What Counts as Considering Race?
One of the biggest questions surrounding the proposal is how broadly the government defines racial consideration.
A school could potentially use race in several different ways.
A straightforward racial preference in admissions would be relatively easy to identify. But other situations could be much more complicated.
For example, a university might provide a scholarship intended to increase enrollment among students from an underrepresented racial group.
Another institution might operate a mentoring program specifically designed for students from particular racial backgrounds.
A school could also collect demographic information for research or recruitment purposes without using race as a deciding factor.
Determining which activities constitute prohibited racial preferences could therefore require detailed investigations and legal interpretation.
This ambiguity is likely to become one of the central disputes if the regulations are challenged.
Schools Could Turn to Race-Neutral Programs
The proposal could encourage educational institutions to redesign programs so that they focus on factors other than race.
Economic disadvantage is one obvious alternative.
Instead of offering assistance to students from a particular racial group, a school could create scholarships for students from low-income families.
Other race-neutral criteria could include first-generation college status, geographic disadvantage, family circumstances or academic achievement.
The administration argues that such approaches can expand opportunity without treating students differently because of their race.
But opponents argue that race-neutral policies may not always address the same inequalities as race-conscious programs.
For example, two students with similar household incomes can still have very different educational experiences because of disparities in schools, neighborhoods and access to resources.
The IRS Already Has a Historical Precedent
The government's position is not entirely new.
The IRS has long recognized a federal policy against racial discrimination by private schools.
That policy dates back to the 1970s and was reinforced by the Supreme Court's decision involving Bob Jones University.
In that case, the Supreme Court upheld the federal government's ability to deny tax-exempt status to a university whose policies violated fundamental public policy against racial discrimination.
The Trump administration is now seeking to apply that broader principle to contemporary disputes involving race-conscious educational policies.
The legal question is whether the existing principle can be extended to programs that schools argue are designed to increase diversity rather than discriminate against particular groups.
The Supreme Court's Affirmative Action Ruling Matters
The administration's argument also rests heavily on the changing legal landscape surrounding affirmative action.
In 2023, the Supreme Court rejected race-conscious admissions systems used by Harvard and UNC.
That decision effectively ended the traditional model of affirmative action in college admissions.
The Trump administration has treated the ruling as evidence that schools should not use racial preferences even when those preferences are intended to promote diversity.
But the legal landscape remains complicated.
Universities have continued to consider applicants' individual experiences, including experiences involving race, so long as race itself is not used as an impermissible admissions preference.
That distinction could become especially important under the proposed tax regulations.
Critics Warn of Broader Consequences
Opponents of the administration's approach argue that the tax proposal could go beyond admissions.
They fear it could discourage schools from studying racial disparities, creating targeted outreach programs or offering support to students who face particular disadvantages.
Another concern is the potential financial impact.
If losing tax-exempt status becomes a realistic possibility, schools may decide to eliminate controversial programs even before the IRS takes enforcement action.
That could create a "chilling effect," in which institutions avoid policies that might be legally defensible simply because they cannot afford the cost of a government dispute.
Critics also argue that using the tax system to influence education policy could give federal officials substantial power over private institutions.
Supporters Say the Rule Protects Equal Treatment
Supporters of the proposal see the issue differently.
They argue that government should not allow nonprofit institutions to receive valuable tax benefits while treating students differently based on race.
From this perspective, the tax exemption is not an unconditional entitlement.
Schools receive a significant public benefit through nonprofit status and should therefore comply with fundamental federal policies against discrimination.
The administration also argues that race-neutral alternatives allow schools to address economic hardship and educational disadvantage without establishing racial preferences.
The Proposal Is Not Yet Final
One of the most important points is that the administration's plan is a proposed regulation, not an immediate nationwide cancellation of schools' tax exemptions.
The rule must go through the federal regulatory process before it can take effect.
That process includes a period for public comments, during which universities, private schools, nonprofit organizations, civil-rights groups, legal experts and members of the public can submit arguments.
The administration is reportedly targeting May 2027 for the rule to take effect if it is finalized.
The final version could change substantially after public comments and legal review.
Lawsuits Are Likely to Follow
Given the political and legal significance of the proposal, court challenges are highly likely if the rule is finalized and enforced.
Universities and advocacy organizations could argue that the administration is exceeding the authority granted to the Treasury Department and IRS.
Other challenges could focus on how the rules define racial discrimination and whether the government is applying the tax code consistently.
The administration, meanwhile, is likely to rely heavily on the Supreme Court's affirmative-action ruling and the earlier Bob Jones precedent.
The resulting litigation could eventually force courts to decide how far the federal government's power extends when tax exemptions are used to regulate educational policies.
A Major Shift in American Education Policy
The proposal represents another major step in the Trump administration's effort to dismantle race-conscious policies across American institutions.
What began largely as a battle over diversity programs has increasingly expanded into questions involving federal funding, admissions, scholarships, hiring, research and nonprofit tax status.
The potential consequences extend beyond college campuses.
If the policy survives legal challenges, private schools may have to reconsider thousands of programs that were created to improve racial diversity or assist specific groups of students.
At the same time, institutions could expand race-neutral alternatives based on income, geography, academic circumstances or other characteristics.
The debate ultimately comes down to two competing interpretations of equality.
The Trump administration argues that equal treatment requires institutions to stop making distinctions based on race.
Opponents argue that eliminating race-conscious programs can sometimes preserve longstanding inequalities rather than eliminate them.
The proposed IRS rule now places that debate directly inside the federal tax system.
And because tax-exempt status is so financially important to nonprofit education, the policy could become one of the administration's most consequential tools in its campaign against DEI in American schools.
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