Trump’s New Rule Could Put 18,000 Private Schools’ Tax-Exempt Status at Risk Over Race-Based Programs

A new Trump administration proposal could force thousands of private schools and colleges to make a stark choice: eliminate programs that consider race or risk losing the federal tax exemption that supports donations, scholarships and long-term finances.

The Treasury Department and Internal Revenue Service issued proposed regulations on Thursday, September 3, that would deny Section 501(c)(3) tax-exempt status to private educational institutions found to discriminate on the basis of race, color, national origin or ethnic origin. The agencies estimate the change could affect as many as 18,000 institutions.

The proposal is not yet final, and no school automatically loses its exemption because of Thursday’s announcement. It must go through the federal rulemaking process, including public comment, and is expected to face legal challenges.

The rule reaches far beyond admissions

The Treasury Department’s official release says the standard would apply to private elementary and secondary schools, colleges, universities, professional schools and trade schools.

Its reach would extend across admissions, educational policies, scholarships and loans, athletics, facilities and every other school-administered or school-supported program. The administration says a school could not make decisions or award benefits based on race, color, national origin or ethnic origin.

That language means the debate is not limited to the admissions policies addressed by the Supreme Court’s 2023 ruling against race-conscious admissions at Harvard and the University of North Carolina. Programs created to support Black, Hispanic and other historically underrepresented students—including certain scholarships, organizations and targeted services—could also come under scrutiny.

Reuters reported that Treasury estimates roughly 750,000 students may qualify for race-based scholarships potentially affected by the proposal.

What schools would still be allowed to consider

The rule would not prohibit schools from directing assistance toward students facing disadvantage. It specifically permits race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, military-family status and academic achievement.

Religious schools would also be allowed to preserve a genuine religious mission, curriculum and program of observance. They could continue selecting students based on legitimate religious affiliation or membership under existing federal law.

The distinction is central to the administration’s argument: help may be targeted according to economic or personal circumstances, but not according to racial or ethnic identity.

Why tax-exempt status matters so much

Private nonprofit schools generally depend on their federal exemption for more than relief from income taxes. It also allows qualifying donations to be tax-deductible, an important incentive for alumni, foundations and other supporters.

Losing that status could therefore affect fundraising, financial aid and the cost of financing major projects. The Associated Press reported that the benefit saves many universities millions of dollars annually and that higher-education groups expect donations earmarked for scholarships to be especially sensitive.

The best-known legal precedent is Bob Jones University, which lost its exemption over a policy barring interracial dating and marriage. The Supreme Court upheld the IRS action in 1983, ruling that an institution violating fundamental public policy was not entitled to the tax benefit.

Treasury says its new proposal updates that principle using later court decisions, including the Supreme Court’s 2023 college-admissions ruling. Critics argue the administration is stretching those precedents to attack programs designed to remedy historical exclusion.

The administration and colleges see opposite civil-rights arguments

Treasury Secretary Scott Bessent said schools cannot preserve racial preferences simply by describing them as equitable, inclusive or diversity-enhancing. IRS leadership likewise warned that institutions continuing practices the government defines as discriminatory should expect to lose their exemptions.

College and faculty organizations counter that the proposal turns civil-rights law against minority students and creates sweeping uncertainty for schools already trying to comply with nondiscrimination rules. The American Association of University Professors told Reuters it was considering legal action.

That disagreement is likely to define the coming fight. The administration presents one uniform race-neutral standard as equal treatment. Opponents say context matters and that programs expanding access should not be equated with policies once used to enforce segregation.

Nothing changes immediately

The IRS summary says that, if finalized, the regulations would apply to taxable years beginning on or after May 31, 2027. That timetable gives institutions months to review admissions, scholarships, student organizations and other programs.

Before then, the proposal must survive public comments, possible revisions and an almost certain courtroom challenge. But even without immediate enforcement, the warning is already clear: the administration wants the financial foundation of nonprofit education tied to its definition of completely race-neutral policy.