Trump Administration Proposes Ending Tax-Exempt Status for Private Schools Over Race-Based Policies

WASHINGTON — The Trump administration is proposing a new federal rule that could put the tax-exempt status of private schools and colleges at risk if they maintain policies or programs that discriminate on the basis of race, color, or national or ethnic origin.

The proposal, announced Thursday by the U.S. Department of the Treasury and Internal Revenue Service, would affect private educational institutions that qualify for federal tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.

Under the proposed regulations, schools could lose their tax-exempt status if they use race-based policies in areas including admissions, scholarships, educational programs, athletics or other school-supported activities. (U.S. Department of the Treasury)

The administration says the proposal is intended to address what it considers discriminatory practices that have been used in the name of diversity, equity and inclusion, commonly referred to as DEI.

Treasury Secretary Scott Bessent said that changing the terminology surrounding a race-based policy would not necessarily change how the government evaluates the policy.

The Treasury Department and IRS estimate that as many as 18,000 private schools, colleges and other educational institutions could potentially be affected by the proposal. (AP News)

What would change?

The proposal would establish that a private school does not qualify for federal tax-exempt status if it adopts, maintains or enforces a policy or practice that discriminates based on race, color, or national or ethnic origin.

The proposed rule would cover more than admissions. It would also apply to scholarships and loans, athletics, educational policies and other programs administered or supported by a school. (U.S. Department of the Treasury)

The proposal is scheduled to apply to taxable years beginning after May 31, 2027, if the regulations are finalized. (Federal Register Public Inspection)

The administration argues that the policy would reinforce existing federal protections against racial discrimination and move educational institutions toward what officials describe as a more merit-based system.

A long-running debate over race and education

The proposal comes amid a broader conflict between the Trump administration and colleges and universities over DEI programs.

Since President Donald Trump returned to office, his administration has taken steps aimed at reducing or eliminating race-based programs at educational institutions. Some universities have closed or renamed DEI offices, while others have changed scholarships and other programs that specifically considered race.

The administration's position is that programs providing benefits or opportunities based on race can themselves constitute discrimination.

Opponents of the administration's approach argue that race-conscious programs can be intended to address longstanding disparities in education and expand opportunities for historically underserved students.

That disagreement places universities in a difficult position: institutions must determine how to comply with federal nondiscrimination requirements while continuing programs designed to support different groups of students.

There is a legal precedent

The federal government has previously challenged a private university's tax-exempt status over racial policies.

In the 1970s, the Internal Revenue Service revoked the tax-exempt status of Bob Jones University because of its policies prohibiting interracial dating and marriage. The U.S. Supreme Court ultimately upheld the government's position.

The university later changed its policy and regained tax-exempt status in 2017. (AP News)

The Trump administration is pointing to this history as an important precedent for using tax law to address discriminatory practices at private educational institutions.

What could happen next?

The proposal is not yet a final rule.

Private schools and colleges would have an opportunity to respond during the federal rulemaking process before the government determines whether to finalize the regulations.

If finalized, affected institutions could face a significant choice: change policies that the government determines violate the new standard or potentially lose their federal tax-exempt status.

The issue could also face legal challenges, particularly over the government's authority to use tax-exempt status as a mechanism for enforcing its interpretation of federal nondiscrimination requirements.

For students, universities and families, the debate extends beyond tax policy. Changes to a school's tax status could potentially affect the institution's finances and, depending on the school, its ability to support financial aid, research and other educational programs.

For now, the proposal represents another major development in the administration's effort to reshape how race and DEI are handled within American education.

Sources

1. U.S. Department of the Treasury — official announcement of the proposed regulations. (U.S. Department of the Treasury)U.S. Department of the Treasury

2. Internal Revenue Service — official explanation of the proposed rule and tax-exempt requirements. (IRS)Internal Revenue Service

3. Federal Register — proposed regulation and applicability date. (Federal Register Public Inspection)Federal Register proposal

4. Associated Press — reporting and additional context on the administration's proposal. (AP News)Associated Press report

5. IRS Publication 557 — background on federal tax-exempt requirements for private schools. (IRS)IRS Publication 557