The Treasury Department and IRS issued proposed regulations on Thursday to eliminate federal tax-exempt status for private educational institutions that consider race in their admissions processes, financial aid distribution, or other school programs. The regulations would take effect for tax years beginning on or after May 31, 2027, and could affect approximately 18,000 private schools across the country, ranging from elementary schools to universities and professional institutions.
Treasury Secretary Scott Bessent characterized the proposal as an effort to eliminate racial discrimination in American education, stating that institutions continuing discriminatory practices would lose their tax-exempt benefits. The measure covers admissions, educational policies, scholarships, loans, athletics, and all school-administered programs, with the exception of schools that select students based on religious affiliation. IRS CEO Frank Bisignano indicated that schools engaging in such practices should expect to lose their tax-exempt status.
One significant consequence of losing 501(c)(3) status involves the elimination of tax deductions for donors. Currently, individuals can claim tax deductions for charitable contributions to schools, with recent tax law changes expanding eligibility for deductions to more taxpayers. Removing tax-exempt status would eliminate this incentive for philanthropic giving, potentially reducing donations to affected institutions.
The proposal also carries implications for approximately 750,000 students attending these schools who may rely on scholarships allocated based on racial, ethnic, or national identity. Schools may be required to modify existing scholarship programs established with race-based eligibility requirements to comply with the new regulations. Tax experts noted that resolving legacy scholarships with donor-imposed restrictions could present complex legal and financial challenges for educational institutions.
The proposal represents an extension of broader Trump administration efforts to dismantle diversity, equity, and inclusion programs at educational institutions, following the Supreme Court’s decision invalidating race-conscious college admissions practices. Advocacy groups have criticized the measure as penalizing schools for addressing documented barriers to educational opportunity for students of color.
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