As many as 18,000 tax-exempt private schools and 750,000 students could be affected by a Treasury Department proposal that would disqualify schools from federal tax exemption if any educational program uses race-based criteria. Released Thursday and scheduled for publication Friday, the 28-page proposed rule would cover private elementary and secondary schools, colleges, universities, professional schools and trade schools beginning with taxable years after May 31, 2027.

The proposal would reach beyond admissions into scholarships, loans, athletics, educational policies and every other school-administered or supported program. It treats a racial classification as discriminatory regardless of whether the purpose is exclusion, remedying past discrimination or increasing diversity. Treasury says schools can continue helping disadvantaged students through income, geography, first-generation status, individual hardship, military-family status and academic achievement, but not by making decisions based on race, color, or national or ethnic origin.

The administration presents the regulation as a uniform application of civil-rights law after the Supreme Court’s 2023 decision limiting race-conscious college admissions. Higher-education groups contend it would convert a historically protective tax rule into a new enforcement weapon against programs meant to widen opportunity. The Associated Press reported that schools are especially concerned about donations, legal uncertainty and compliance costs. The rule is proposed, not final, and would likely face litigation.

The Proposal Rewrites a Longstanding IRS Distinction

Private schools have long been required to adopt and operate under racially nondiscriminatory policies to qualify under Section 501(c)(3). An existing 1975 revenue procedure requires schools to publish that policy, maintain records and certify compliance. It also says programs favoring minority groups do not violate the rule when their purpose and effect are to establish or maintain a school’s nondiscriminatory policy, including certain scholarships and financial-aid programs.

Treasury and the Internal Revenue Service now propose deleting that distinction. Their new standard would define race-based action for any purpose as incompatible with tax exemption, including action intended to address the effects of prior discrimination. The government’s announcement says rebranding preferences as equitable or inclusive does not change their character. It emphasizes that schools may still pursue access and anti-prejudice efforts if the eligibility rules themselves remain race-neutral.

The proposal applies only to educational organizations operating as private tax-exempt entities. Government units, their agencies and schools owned or operated by those agencies are excluded from this particular tax regulation, although public schools remain subject to constitutional and statutory nondiscrimination requirements. Religious schools could retain religious missions and select students based on genuine religious affiliation, provided the criterion is not a substitute for ancestry or ethnicity. That combination makes the rule broad across private education but not universal across American schools.

Section 501(c)(3) exempts organizations operated exclusively for charitable or educational purposes, subject to limits on private benefit, lobbying and political campaigns. The statute does not define every activity consistent with charity. For decades, the IRS and courts have treated compliance with fundamental public policy as part of the charitable standard, giving the agency a basis to deny an exemption when an institution’s practices conflict with a deeply established national rule.

The central precedent is Bob Jones University v. United States. In 1983, the Supreme Court upheld revocation of exemptions for a university and a Christian school whose policies reinforced racial segregation, including restrictions on interracial dating and marriage. The Court concluded that racially discriminatory education violated fundamental national policy. Treasury argues that the same principle now supports a categorical rule against racial classifications, even when schools describe their objectives as remedial rather than exclusionary.

The administration also relies on SFFA v. Harvard, which held in 2023 that Harvard’s admissions system violated Title VI and the University of North Carolina’s violated equal-protection requirements. The majority found that their programs lacked measurable objectives, used race negatively, involved stereotyping and had no meaningful endpoint. The new regulation applies that reasoning to more institutions and more activities than the ruling itself directly resolved, including private K-12 schools and scholarship programs outside admissions.

Scholarships Carry the Largest Measured Effect

Treasury’s estimate of 750,000 potentially affected scholarship recipients sounds precise, but its source is a 1994 Government Accountability Office survey rather than a current administrative count. The IRS does not collect student race or ethnicity data, and the proposal acknowledges that it lacks models to quantify donors supporting race-restricted funds. The estimate therefore identifies the possible scale of exposure, not the number of students certain to lose aid or the number of schools presently violating the proposed standard.

The agencies predict that schools will preserve their exemptions by revising eligibility rather than ending scholarships. They expect the total value and number of awards to remain broadly unchanged, while acknowledging that the composition of recipients could shift. Schools could replace racial criteria with family income, neighborhood, first-generation status or individual hardship. Those alternatives may overlap substantially with the intended beneficiaries of current programs, but they are not guaranteed to reproduce the same racial distribution.

Donor restrictions create a harder operational problem. A school with an endowed scholarship whose governing document specifies race may need to negotiate with the donor or heirs, seek a legal modification, return money or leave funds unawarded. Treasury says all restricted endowments, including restrictions unrelated to race, support no more than 16% of scholarship dollars. It consequently predicts limited aggregate cost, while conceding that it cannot precisely model legal and administrative expenses for institutions holding affected funds.

Tax Exemption Makes the Rule a Powerful Lever

Losing exemption can impose federal income tax on an institution and disrupt fundraising because Section 170 generally lets taxpayers deduct qualifying charitable contributions. The financial consequence would vary sharply: wealthy universities, tuition-dependent colleges and small religious schools have different income, donor bases and assets. The immediate pressure may come less from a prospective tax bill than from uncertainty among donors, foundations, lenders and governing boards about whether an institution remains eligible for charitable support.

Revocation would not occur automatically when the proposal is published or simply because a school uses the label diversity, equity and inclusion. The IRS would need facts showing that a policy uses a covered racial classification, and affected institutions would have administrative and judicial avenues to contest a determination. Still, official statements are deliberately forceful. IRS chief executive Frank Bisignano said schools continuing discriminatory practices should expect to lose status, signaling that the regulation is meant to change conduct before formal enforcement cases arise.

Supporters argue that a single race-neutral standard treats students as individuals and aligns tax benefits with the Supreme Court’s recent direction. Critics counter that equating anti-segregation exclusions with programs designed to overcome their effects ignores history and stretches SFFA beyond admissions. The American Association of University Professors is considering legal action, while private-college representatives warn about ambiguous compliance duties, according to Reuters. Those competing claims will likely shape both comments and eventual court review.

A Final Rule Is Months Away

The public will have 60 days after Federal Register publication to comment and request a hearing. Treasury says it expects to consider submissions, make any necessary revisions and finalize the regulation before May 31, 2027. The current document leaves the exact comment deadline as a publication-date placeholder, so institutions should rely on the official docket once posted rather than calculate a deadline from Thursday’s advance release.

If finalized as written, the regulation would apply to taxable years beginning after May 31, 2027. That timing gives schools months to inventory admissions rules, scholarships, student programs, donor agreements and athletic policies. It does not mean every covered school must abandon diversity goals. The proposal expressly allows outreach and assistance built on race-neutral measures, and it preserves programs aimed at eliminating prejudice when their benefits are not allocated by protected racial categories.

The decisive questions now are whether Treasury narrows the rule after comments, how the IRS defines prohibited practices in enforcement and whether courts view the change as a lawful update or an overextension of tax authority. The proposal establishes a clear direction but not an immediate loss of status for any named institution. For schools and students, its real effect will depend on final language, compliance choices and the judicial treatment of a policy that links federal tax benefits to a newly categorical understanding of racial neutrality.