The Trump administration is proposing a major change that could carry serious financial consequences for thousands of private schools, colleges and universities across the United States.
Under new regulations proposed by the Treasury Department and Internal Revenue Service, private educational institutions could lose their federal tax-exempt status if they use race, color, or national or ethnic origin when making decisions involving admissions, scholarships, financial assistance and other school programs.
The proposal does not directly eliminate federal funding for every affected institution. Instead, it targets the valuable federal tax exemption available to qualifying private educational institutions.
If finalized, the change could force thousands of schools to review how they award scholarships, admit students and operate other programs.
Trump Administration Takes Aim At Race-Based Policies
The proposed regulations are part of the Trump administration’s broader effort to eliminate race-based preferences and diversity, equity and inclusion policies throughout American education.
Treasury Secretary Scott Bessent said describing racial preferences as efforts to promote diversity or inclusion does not change the administration’s view that such practices constitute discrimination.
The administration maintains that students should be treated equally under the law and that schools benefiting from federal tax exemptions should not make opportunities available or unavailable because of a student’s race.
The proposal would establish that principle across a wide range of educational activities.
Admissions And Scholarships Could Be Affected
The regulations would extend well beyond the college admissions process.
They could apply to admissions policies, scholarships, student loans, athletics and other programs administered or supported by private educational institutions.
That means a school could potentially jeopardize its tax-exempt status by using race as a deciding factor in determining which students qualify for certain opportunities.
The proposal would cover private elementary and secondary schools as well as colleges, universities and other qualifying educational institutions.
It could also affect scholarship funds administered by private schools when racial or ethnic criteria are used to determine eligibility.
Supreme Court Decision Changed College Admissions
The administration’s new action comes in the wake of the Supreme Court’s major 2023 ruling that restricted the use of race in college admissions.
In Students for Fair Admissions v. Harvard, the Supreme Court sharply restricted the ability of colleges and universities to consider an applicant’s race during the admissions process.
The Trump administration is now seeking to establish broader rules governing how private educational institutions use race in other areas.
Scholarships and monetary assistance are among the most significant areas covered by the proposal.
Up To 18,000 Schools Could Be Impacted
The potential reach of the regulations is substantial.
Treasury and the IRS estimate that approximately 18,000 private elementary, secondary and post-secondary schools currently qualify for federal tax-exempt status and could fall within the scope of the regulations.
Officials also estimate that approximately 750,000 students attending these institutions may currently qualify for scholarships allocated using racial, ethnic or national identity criteria.
That does not mean all 18,000 schools would lose their tax exemptions.
Treasury expects institutions to change their policies when necessary so they can remain compliant and preserve their tax-exempt status.
For schools currently offering race-based scholarships or other programs, however, the proposal could require significant policy changes.
Schools Could Still Help Disadvantaged Students
The regulations would not prevent schools from providing additional assistance to students facing financial or educational disadvantages.
Instead, institutions could use race-neutral standards when deciding who receives assistance.
Schools could potentially consider factors such as household income, geographic location, first-generation college status and other individual circumstances without making race the determining factor.
This distinction could become especially important for colleges seeking to maintain economically diverse student populations while complying with federal nondiscrimination requirements.
Under the proposal, schools could continue helping students who need additional opportunities, but eligibility could not be determined on the basis of race, color, or national or ethnic origin.
Religious Schools Would Retain Key Protections
Private religious schools would also retain important protections.
The proposed regulations would not prevent an educational institution from maintaining a religious mission, religious curriculum or other faith-based programs.
Religious institutions could also continue considering genuine religious affiliation when selecting students when permitted under federal law.
The administration’s proposal is specifically focused on discrimination involving race, color, or national or ethnic origin rather than eliminating the religious character of private schools.
What Losing Tax-Exempt Status Could Mean
Federal tax-exempt status can provide substantial financial advantages to qualifying nonprofit educational institutions.
Losing that status could therefore have significant tax and financial consequences.
The possibility of losing the exemption may encourage schools to examine existing admissions, scholarship and financial-aid policies before any final regulations take effect.
Treasury officials expect schools to modify policies that conflict with the proposed regulations rather than surrender their tax-exempt status.
That could mean some race-based scholarship programs are rewritten using financial need or other race-neutral eligibility standards.
Critics Prepare To Fight The Proposal
The proposal is already drawing opposition from organizations representing higher education.
The American Association of University Professors has indicated that it is considering legal action.
Critics contend that programs intended to address historical discrimination should not automatically be treated as equivalent to policies designed to exclude racial minorities.
Supporters of race-neutral policies counter that government nondiscrimination standards should apply equally regardless of the motivation behind treating students differently according to race.
That fundamental disagreement could become a central issue in future litigation.
Proposal Is Not Yet Final
The regulations have not yet become final federal policy.
The Treasury Department and IRS published the proposal as part of the federal rulemaking process, allowing members of the public and interested organizations to submit comments.
That process could result in modifications before a final regulation is issued.
Legal challenges are also possible if the administration ultimately adopts the rules.
As a result, schools would not immediately lose their tax-exempt status simply because the proposal has been announced.
Trump Continues Crackdown On DEI Policies
The regulations represent another significant development in the Trump administration’s campaign against race-based preferences and DEI initiatives.
Since returning to the White House in January 2025, President Donald Trump has pushed federal agencies to examine diversity policies across government, education and other institutions.
Colleges and universities have received particular attention.
The administration has challenged institutions over issues including race-conscious admissions, scholarships and allegations of antisemitism on college campuses.
Harvard University has been among the most prominent institutions caught up in disputes with the administration over federal funding, investigations and its tax-exempt status.
The latest proposal, however, has implications extending well beyond America’s elite universities.
What Happens Next
The immediate question is whether the Treasury Department and IRS ultimately adopt the regulations in their current form.
If that happens, private schools could face a clear financial incentive to eliminate policies that use race in admissions, scholarships, financial assistance, athletics or other school-administered programs.
Schools could still direct resources toward disadvantaged students using race-neutral standards such as financial need or first-generation status.
For families and students, the proposal could eventually change how certain scholarships and educational opportunities are awarded.
For colleges and private schools, the stakes could be considerably larger because federal tax-exempt status may be on the line.
The debate is therefore likely to continue over a fundamental question facing American education: Should race ever be used when deciding which students receive admissions preferences, scholarships or other educational opportunities?