The Internal Revenue Service (IRS) and the Treasury Department recently proposed a new rule that would end federal tax-exempt status for private colleges and private educational institutions that use diversity, equity, and inclusion (DEI) policies.
“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” said Treasury Secretary Scott Bessent. Bessent also linked the new IRS proposal to President Trump’s position that any school maintaining race-based scholarships or admissions policies is illegally discriminating against white and Asian students.
Under the proposed rule, Racial Nondiscrimination in Private Schools, policies or programs that discriminate on the basis of race, color, or national or ethnic origin (regardless of whether the school says the policy serves remedial or diversity-related goals) could cost a private school its federal tax-exempt status. This includes:
- Admissions
- Educational policies
- Scholarship awards
- Student loans
- Athletics
Why Are DEI Programs Considered Racial Discrimination?
Organizations and nonprofits that operate for charitable and educational purposes often enjoy federal tax-exempt status, or 501(c)3 status. To qualify for and maintain tax-exempt status, organizations must adhere to public policy, which prohibits racial discrimination.
In IRS policies dating back to the 1970s, private schools lost their federal tax-exempt status if they racially discriminated. Earlier IRS rules gave private schools some room to consider race in programs designed to address past discrimination or promote diversity. Under the new proposal, that flexibility would be removed: schools could no longer use race as a factor, even when the goal is to expand opportunity or create a more diverse student body.
In 1954, Brown v. Board of Education held that state-enforced racial segregation in public schools violates the Constitution. In 1983, the Supreme Court ruled in Bob Jones University v. United States that a private school with racially discriminatory policies could lose its federal tax-exempt status because those policies violated fundamental public policy. In 2023, the Court held in Students for Fair Admissions v. Harvard that Harvard’s and the University of North Carolina’s race-conscious admissions programs were unlawful.
The IRS cites these cases as legal background for its proposed rule, which would apply a broader nondiscrimination standard to private schools seeking or maintaining federal tax-exempt status.
What Does This Mean for Students?
Students could no longer qualify for scholarships or grants that consider race, color, or national or ethnic origins.
The proposed rule would not affect financial aid eligibility for students qualifying for need‑based, first-generation, geographic, hardship, or military family loans. However, the rule would prohibit any aid tied to race.
The proposed rule would significantly affect admissions and access programs. Any pipeline programs, mentorship networks, or diversity efforts that prioritize students of color would no longer be allowed. This may also change how some students access campus support services.
What Would Change for Schools?
The proposed rule would apply to over 18,000 private primary schools, high schools, colleges, and universities in the U.S.
The recent IRS guidance would require these private schools to rebrand any admissions, scholarship, or student support programs that rely on race as a factor. Policies that once fell under DEI or affirmative action umbrellas would need to shift to use race-neutral criteria, such as income, first-generation status, or academic achievement.
Schools that continue to use race-based practices risk losing their federal tax exemption. This would not only be a significant blow to an institution’s financial picture, but it would also affect fundraising and tax-deductible donations.
The rule does not prevent schools from expanding access for disadvantaged students. It just requires them to do so through merit‑based or need‑based criteria. It also does not apply to religious schools that prioritize students based on genuine religious affiliation.
How Private Schools Can Prepare
The rule is not final. The proposal becomes law only if the IRS completes the federal rulemaking process, which includes a public comment period, revisions, and publication of a final rule. It must also withstand any court challenges.
If the rule clears these hurdles, it would take effect for tax years beginning May 31, 2027. Private schools and their legal counsel should prepare for this possibility. Key steps include:
- Audit admissions and scholarship criteria
- Evaluate DEI programs for race‑based components
- Assess financial implications if tax‑exempt status is lost
- Prepare for potential litigation or public commentary
Anyone can submit a public comment on proposed government rules, including this one. You don’t have to be a legal expert or a politician to make your voice heard. You have until November 3, 2026 to submit your comment.
