The U.S. Department of the Treasury proposed a new rule that would strip private schools, colleges, and universities of their tax-exempt status if they provide race-conscious targeted support or financial aid to students. According to the Treasury Department, the proposed regulations target policies offering preferences in admissions, scholarships, and facility access based on race, marking a significant escalation in the administration’s campaign against diversity, equity, and inclusion programs.
If approved, the new standards are scheduled to take effect after May 2027, following the conclusion of the academic year. Treasury Secretary Scott Bessent announced the regulatory project on the social media platform X, stating that renaming racial preferences under terms like “fair,” “inclusive,” or “diversity-enhancing” does not alter their discriminatory nature. The Department of the Treasury and the Internal Revenue Service estimate that the rule could impact up to 18,000 private educational institutions nationwide.
The Legal and Tax Mechanics Behind the Proposal
Private universities in the United States have maintained exemptions from federal taxes for more than a century under the premise that they provide a public benefit. Under current rules, maintaining a non-profit status allows organizations to deduct donations from the tax base. Federal authorities rarely strip universities of this tax-exempt status, with the most prominent historical precedent occurring in the 1970s. In that case, Bob Jones University in South Carolina lost its tax-exempt status due to campus bans on interracial dating and marriage, a penalty that the U.S. Supreme Court upheld before the institution reversed its policies and restored its status in 2017.
The administration is positioning the new rule as a restoration of merit-based standards in education, asserting that race-conscious preferences violate Title IV of the Civil Rights Act of 1964. Officials contend that these admissions and scholarship structures discriminate against white and Asian American students.
Higher Education Pushback and Industry Response
Higher education leaders have strongly criticized the Treasury Department’s proposal. Mike Gavin, president and chief executive officer of the Higher Education Alliance, characterized the regulatory changes as a direct barrier to educational access. According to Gavin, the administration is attempting to hinder working-class Americans and racial minorities from securing access to higher education and upward mobility.
The administration's broader pressure campaign has already prompted dozens of universities to voluntarily close or rename diversity offices, as well as eliminate targeted scholarships and student affinity groups.
Compliance and Future Timeline
To retain their non-profit status, educational institutions must navigate strict IRS guidelines governing lobbying, political campaign participation, and public reporting. While the Treasury’s proposed rule undergoes the standard federal rulemaking process, laws prohibit selective enforcement against organizations for ideological reasons. As the May 2027 effective date approaches, private institutions face a complex compliance landscape regarding student support services, institutional endowments, and federal civil rights statutes.