Treasury and the IRS have proposed new rules that could affect the federal tax-exempt status of private schools and colleges using race-based admissions, scholarships, or other programs.
The U.S. Department of the Treasury and Internal Revenue Service have proposed a significant change to federal tax rules governing private schools and colleges.
Under regulations published in the Federal Register on September 4, 2026, a tax-exempt private educational institution could lose eligibility under Section 501(c)(3) if it adopts, maintains, or enforces policies that discriminate based on race, color, or national or ethnic origin.
The proposal reaches beyond admissions. It would also apply to scholarships, financial assistance, athletics, educational programs, and other school-administered or school-supported activities.
Treasury and the IRS estimate that as many as 18,000 private educational institutions could fall within the rule’s scope.
Bottom Line: This is a proposed federal regulation, not a final rule. If finalized substantially as written, however, it could require many private schools, colleges, universities, professional schools, and trade schools to review race-conscious scholarships, admissions practices, and other programs in order to preserve federal tax-exempt status.
Editorial Note
This article examines a proposed federal tax regulation involving race, education, civil-rights law, and nonprofit status.
New To Education does not take a position on the proposal or on the broader political debate surrounding affirmative action, diversity programs, or federal education policy. References to discrimination, preferences, remedial programs, or diversity initiatives are presented according to the legal language used by government agencies, courts, institutions, or commentators.
The regulation remains subject to public comment and may be revised, delayed, challenged, or withdrawn before becoming final.
This article is for educational and informational purposes and does not constitute legal, tax, financial, or political advice.
What We Know
Treasury and the IRS formally published the proposal as REG-119986-25, RIN 1545-BS05, titled Racial Nondiscrimination in Private Schools.
The proposal would create a new section of federal tax regulations stating that a private school cannot qualify as an organization operated exclusively for exempt purposes if it discriminates on the basis of race, color, or national or ethnic origin.
The proposed language applies to educational policies, admissions, scholarships and loans, athletics, and other school-supported programs.
The definition of “private school” is broad.
It includes tax-exempt private elementary and secondary schools as well as colleges, universities, professional schools, and trade schools that meet the applicable federal definition of an educational organization.
Government-operated institutions are excluded from this particular tax regulation.
What Would Actually Change?
Federal tax policy already prohibits private schools with racially discriminatory policies from qualifying for tax-exempt status.
That principle is decades old.
Current IRS guidance requires private schools seeking tax-exempt treatment to maintain and publicize racially nondiscriminatory policies. Schools must generally state that students of all races have access to the rights, privileges, programs, and activities made available by the institution.
Where the new proposal becomes especially significant is in its treatment of race-conscious programs intended to promote diversity or address discrimination.
Existing IRS guidance includes language permitting some programs that favor racial minority groups when the purpose and effect are to help establish or maintain a racially nondiscriminatory school environment.
The proposed regulations would remove that language.
Treasury and the IRS instead propose a uniform standard under which discrimination based on race, color, or national or ethnic origin would be incompatible with tax exemption regardless of the stated purpose, including when a policy is intended to pursue diversity or address broader societal discrimination.
That distinction is at the center of the current debate.
Scholarships Could Be Significantly Affected
Scholarships may become one of the most immediate compliance issues for private colleges and universities.
Many institutions and charitable donors have historically created scholarships targeted toward students from specific racial or ethnic communities.
If the regulations are finalized as proposed, schools could face tax-exemption concerns when administering scholarships that explicitly use race, color, or national or ethnic origin as an eligibility factor.
Treasury’s economic analysis acknowledges that some schools may need to change scholarship criteria and that donors who previously funded race-conscious programs may need to use alternative eligibility standards.
The proposal specifically identifies several alternatives institutions could continue using.
Schools could target educational opportunity using factors such as family income, geographic location, first-generation status, individual hardship, military-family status, or academic achievement without directly assigning benefits according to race.
That means the proposal does not prevent institutions from attempting to reach disadvantaged populations.
It would instead require them to use race-neutral criteria.
This Is Broader Than College Admissions
The Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard dramatically changed race-conscious college admissions.
But the Treasury proposal goes beyond admissions.
Its language would reach scholarship programs, athletic programs, educational policies, student programs, loans, and other school-supported activities.
For that reason, compliance offices may eventually need to examine much more than application forms.
Institutions could potentially have to review scholarship eligibility, donor restrictions, student-support programs, campus opportunities, and other policies that expressly use racial classifications.
Treasury says the purpose is to create one consistent nondiscrimination standard across private educational institutions.
What the Proposal Does Not Do
The regulation does not say that private schools must abandon efforts to expand educational access.
It also does not prohibit schools from discussing racial discrimination, teaching civil-rights history, conducting research involving race, or operating programs designed to reduce prejudice.
Treasury states that organizations could continue adopting policies intended to eliminate prejudice and discrimination so long as those efforts do not themselves distribute opportunities or benefits based on race, color, or national or ethnic origin.
The proposal also preserves the ability of religious schools to maintain religious missions, curricula, and observances.
Religious institutions could continue selecting students based on genuine religious affiliation or membership, provided the selection criterion is actually religious rather than a substitute for race or ethnicity.
Why Bob Jones University Matters
One of the central legal foundations cited by Treasury is the Supreme Court’s 1983 decision in Bob Jones University v. United States.
That case involved private religious educational institutions whose policies prohibited interracial relationships.
The Supreme Court upheld the IRS’s denial of tax-exempt status, concluding that racial discrimination in education violated a fundamental national public policy and was inconsistent with the charitable principles underlying Section 501(c)(3).
Treasury argues that the same broader principle supports the new regulation: an educational institution engaging in racial discrimination should not receive the federal benefits associated with charitable tax exemption.
The current controversy is not primarily about whether racial segregation can receive tax-exempt protection. Federal law on that point has been settled for decades.
The harder question is how broadly the Bob Jones principle extends to modern race-conscious programs designed for different purposes.
The 2023 Supreme Court Admissions Decision Also Matters
Treasury also relies heavily on the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard and the companion case involving the University of North Carolina.
The Court concluded that the admissions systems challenged in those cases did not satisfy constitutional and statutory requirements governing the use of race.
Among other concerns, the majority concluded that the programs lacked sufficiently measurable objectives, allowed race to operate negatively in some admissions decisions, involved racial stereotyping, and lacked meaningful endpoints.
Treasury’s proposed regulation interprets that decision, together with earlier civil-rights cases, as support for a broader federal policy against making educational decisions according to race.
Critics of the proposal argue that the administration is extending the Supreme Court’s admissions ruling into areas the Court did not directly decide, particularly scholarships and other educational programs.
The legal scope of that extension could become an important issue if the final regulation is challenged.
Why Tax-Exempt Status Matters So Much
Section 501(c)(3) status is enormously important to nonprofit educational institutions.
It generally exempts qualifying organizations from federal income taxation and supports the tax-deductibility of eligible charitable donations.
Private universities, schools, and educational organizations often rely heavily on philanthropy.
A threat to tax-exempt status therefore reaches beyond an institution’s annual tax bill.
It can potentially affect fundraising, donor behavior, endowments, financial planning, and the institution’s broader nonprofit structure.
That is one reason schools may begin reviewing their policies before any enforcement action takes place.
Treasury itself predicts that most affected schools would modify their programs rather than surrender tax-exempt status.
The Rule Could Affect About 18,000 Institutions
Treasury and the IRS estimate that as many as 18,000 tax-exempt private educational institutions could potentially fall within the new framework.
That does not mean 18,000 schools are currently violating the proposed standard.
It means approximately that many institutions may be covered and could need to evaluate whether their current policies comply.
The group includes institutions ranging from private K–12 schools to major nonprofit universities, professional schools, and trade schools.
Because institutions structure their programs differently, the practical impact could vary substantially.
Why This Matters for Colleges
For colleges, the proposal adds another layer to the rapidly changing legal environment surrounding race and admissions.
Many universities already changed admissions procedures following the Supreme Court’s 2023 ruling.
The new proposal could require a second, broader review.
Institutions may now need to ask whether scholarships, student programs, financial assistance, or other policies use racial classifications that could affect their federal tax status.
That places university legal counsel, financial-aid offices, advancement offices, admissions departments, and nonprofit compliance teams in the same conversation.
Why This Matters for Students
Students could see the consequences most directly through scholarships and financial assistance.
Programs currently restricted by race or ethnicity may eventually be rewritten around different eligibility factors.
A scholarship previously available to students from a particular racial background could, for example, be redesigned around family income, first-generation college status, geographic disadvantage, individual hardship, or another race-neutral characteristic.
That does not necessarily mean the scholarship money disappears.
The larger question is who becomes eligible and how institutions design the replacement criteria.
Why This Matters for Donors
The proposed rule could also create challenges involving restricted charitable gifts.
Some donors have given universities money with instructions requiring scholarships to benefit students from particular racial or ethnic groups.
Changing those restrictions may not always be simple.
Depending on how a gift or endowment was created, institutions may need to review donor agreements, state charitable-trust law, and other legal requirements before modifying how the funds are distributed.
Treasury acknowledges that institutions with endowed race-based scholarships could face legal and administrative costs when attempting to bring those funds into compliance.
Key Takeaways
- Treasury and the IRS published proposed regulations on September 4, 2026, governing racial nondiscrimination and federal tax exemption for private educational institutions.
- The proposal could apply to approximately 18,000 private K–12 schools, colleges, universities, professional schools, and trade schools.
- The rule would cover admissions, scholarships and loans, educational policies, athletics, and other school-administered or supported programs.
- Existing IRS provisions allowing certain race-conscious programs intended to support nondiscrimination would be removed if the regulation is finalized as proposed.
- Schools could continue using race-neutral factors including income, geography, first-generation status, hardship, military-family status, and academic achievement.
- This is not yet final federal law or regulation. Public comments remain open through November 3, 2026.
What to Watch Next
The most important date is November 3, 2026.
Treasury and the IRS are accepting written and electronic comments on the proposal until that date. Requests for a public hearing are also due by November 3.
After reviewing those comments, Treasury could modify the regulation before issuing a final rule.
The agencies currently expect to finalize the regulations before May 31, 2027.
If finalized on the current schedule, they would apply to private-school taxable years beginning after May 31, 2027.
Legal challenges are another possibility.
Future litigation could test whether Treasury’s interpretation of Section 501(c)(3), Bob Jones University, and Students for Fair Admissions supports applying the tax-exemption consequences to the full range of programs covered by the proposal.
Until the rule becomes final and those questions are resolved, institutions will be operating in a period of significant legal uncertainty.
FAQ
Has the IRS already revoked colleges’ tax-exempt status under this new rule?
No.
This is currently a proposed regulation and remains in the federal rulemaking process.
Does this apply to public universities?
Not through this particular Section 501(c)(3) regulation.
The proposed definition excludes governmental entities and organizations owned or operated by government agencies. Other federal and constitutional nondiscrimination rules can still apply to public institutions.
Would race-based scholarships be affected?
Potentially, yes.
The proposed regulation expressly covers scholarship and loan programs and would remove existing IRS language permitting some programs favoring racial minority groups for nondiscrimination purposes.
Can schools still help disadvantaged students?
Yes.
Treasury expressly identifies race-neutral factors such as income, geography, first-generation status, hardship, military-family status, and academic achievement as possible ways to expand opportunity.
Is this the same as the Supreme Court’s affirmative-action ruling?
No.
The Supreme Court’s 2023 decision concerned specific university admissions systems.
This is a Treasury and IRS tax regulation that would extend nondiscrimination requirements across a broader range of programs when determining eligibility for federal tax-exempt status.
When could the rule take effect?
If finalized on the proposed schedule, it would apply to taxable years beginning after May 31, 2027.
Final Thoughts
The immediate legal question is not whether racial discrimination is compatible with federal tax exemption. Decades of federal law and Supreme Court precedent have already established that racial discrimination in education can disqualify an institution from charitable tax treatment.
The emerging dispute concerns the boundaries of that principle.
Treasury and the IRS are proposing that the same nondiscrimination standard apply even when a race-conscious policy is intended to increase diversity or address disadvantage.
Whether that interpretation survives the rulemaking process—and potentially federal litigation—will determine how significant this proposal ultimately becomes.
For schools, students, and donors, the next major milestone is the November public-comment deadline.
Related Articles
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New Federal Civil-Rights Rule Could Make School Discrimination Harder to Prove
This article explains a separate 2026 federal change involving Title VI and the standards used to investigate discrimination in education.
Education Policy Watch: A Supreme Court Petition Could Shape the Future of Selective School Admissions
This piece examines the related debate over race-neutral admissions policies and when they can face constitutional challenges.
Key Documents
Federal Register / GovInfo — Racial Nondiscrimination in Private Schools, REG-119986-25
Official federal rulemaking material containing the proposed regulation, legal background, economic analysis, and proposed implementation schedule.
https://www.govinfo.gov/content/pkg/FR-2026-09-04/pdf/FR-2026-09-04.pdf
IRS — Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools
Official IRS explanation of the proposed regulation, covered institutions, and race-neutral alternatives.
Sources
Internal Revenue Service — Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools
September 3, 2026. Primary federal source explaining the proposal, covered institutions, race-neutral alternatives, and anticipated implementation schedule.
GovInfo / Federal Register — Racial Nondiscrimination in Private Schools
September 4, 2026. Primary federal source containing the complete proposed rule, legal basis, economic analysis, public-comment deadline, and proposed implementation schedule.
https://www.govinfo.gov/content/pkg/FR-2026-09-04/pdf/FR-2026-09-04.pdf
U.S. Department of the Treasury — Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools
September 3, 2026. Treasury’s official explanation of the policy and its relationship to federal nondiscrimination precedent.
https://home.treasury.gov/news/press-releases/sb0621/
Internal Revenue Service — Publication 557: Tax-Exempt Status for Your Organization
Current IRS guidance describing the existing federal framework governing tax-exempt organizations, including private-school nondiscrimination requirements.
https://www.irs.gov/publications/p557
Associated Press — Trump Administration Pushes to Remove Tax Exemption for Private Colleges With DEI Policies
September 3, 2026. Independent reporting on the proposal, reactions from higher education, and potential legal questions surrounding its scope.
https://apnews.com/article/f8556ba3d94099df3c8aaa06fc13105f
The Wall Street Journal — IRS Proposes Rules to Strip Exemptions From Colleges Using Race in Policies
September 4, 2026. Independent reporting on the proposal’s financial implications and differing interpretations of its relationship to Supreme Court precedent.
