Proposed Treasury and IRS rule targets race-based practices in admissions, scholarships, athletics, and other school programs

Private educational institutions face another significant development in the Trump Administration’s ongoing efforts to eliminate race-based preferences and diversity, equity, and inclusion (DEI) practices.

The proposed rule, issued jointly by the U.S. Department of Treasury (Treasury) and Internal Revenue Service (IRS) on September 3, 2026, would affect the federal tax-exempt status of private schools, colleges and universities under section 501(c)(3)of the Internal Revenue Code. 

Under the proposed rule, a private educational institution would not qualify for federal tax-exempt status if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The prohibition would extend beyond admissions to educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs. The proposed rule also makes clear that race-based practices intended to further remedial or diversity-related objectives would be treated as discrimination for purposes of the rule.

The Administration estimates that the proposal could affect as many as 18,000 private educational institutions, from grade schools to universities.

The proposed rule, titled “Racial Nondiscrimination in Private Schools,” is expected to be published in the Federal Register on September 4, 2026. Public comments would be due 60 days after publication, on November 3, 2026.  If finalized as proposed, the regulations would apply to taxable years beginning after May 31, 2027.

The Significance of Tax-Exempt Status

Section 501(c)(3) status provides important financial benefits to private educational institutions, including exemption from federal income tax and the ability to receive tax-deductible charitable contributions. Loss of tax-exempt status could have significant financial and operational consequences for an affected institution. The tax-exempt status for private colleges and universities comes with a significant financial advantage of millions of dollars saved each year per institution.

Institutions that lose their section 501(c)(3) status could face difficult decisions regarding programs, financial aid, and other expenditures as they address the resulting financial impact. Given the potential consequences, the proposed rule also may face legal challenges if finalized.

The Trump Administration’s Focus on DEI

The proposed rule is the latest in a series of actions by the Trump Administration targeting race-based preferences and DEI practices. Since January 2025, the Administration has used Executive Orders, non-binding agency guidance, grant terminations, subpoenas, and other enforcement mechanisms to challenge practices it considers discriminatory.

Higher education has been a particular focus. Most recently, federal agencies have investigated the admissions practices of a number of medical schools for potential violations of Title VI of the Civil Rights Act. In June 2026, the Department of Justice (DOJ) announced investigations into 15 medical schools after stating that investigations of two other institutions found that they had illegally used race in admissions.

In response to these enforcement activities, many colleges and universities have grappled with whether to maintain their DEI offices, policies, scholarships, affinity groups, and other initiatives. The proposed rule potentially raises the stakes by tying compliance with racial nondiscrimination requirements directly to an institution’s federal tax-exempt status.

In announcing the proposed rule, Secretary Scott Bessent indicated that even policies that do not directly implicate DEI could be viewed as problematic. “Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Bessent said.

Immediate Action Steps

Although the rule is only proposed, private colleges, universities and other private educational institutions should consider reviewing policies and practices that use race, color, or national or ethnic origin as a criterion or factor, including those involving admissions, scholarships and financial assistance, athletics, and other school-administered or school-supported programs.

Impacted institutions also should consider submitting public comments addressing the proposed rule and its potential legal, operational, and financial implications before the November 3, 2026 deadline.

Stay up to date on developments impacting higher education by joining Feldesman’s Higher Education Insights: Fall 2026 Update on Agency Priorities. Geared toward research institutions, colleges, and universities, this webinar will address new obligations and compliance requirements expected to affect institutions of higher education during the remainder of 2026.

Feldesman’s Education Practice Group is continuing to review the proposed rule and is monitoring the implications for colleges, universities, and private schools.  If you have questions about the proposed rule or about the Administration’s focus on DEI initiatives, please contact Mindy B. Pava.