A new proposed rule would strip federal tax-exempt status from private schools — colleges included — that use race in admissions, scholarships, or financial aid, even when the practice is relabeled as diversity or equity.
The Treasury Department and IRS proposed a regulation Thursday that would deny 501(c)(3) tax-exempt status to any private school — including colleges, universities, professional schools, and trade schools — that "adopts, maintains, or enforces" a policy or practice that discriminates based on race, color, or national or ethnic origin. Under the Treasury Department's announcement, the rule would reach admissions, scholarships and loans, athletics, and every other school-administered program, and Treasury estimates it could affect as many as 18,000 institutions. Schools that select students by religion are exempt from the rule.
Treasury Secretary Scott Bessent made clear the rule is meant to close what the administration sees as a rebranding loophole: "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," he said. If finalized as proposed, the rule would apply to taxable years beginning on or after May 31, 2027 — meaning it isn't an immediate change, but a multi-month public comment period and a hard compliance deadline are now on the calendar for every private college that offers race-targeted aid or admissions consideration.
Higher education groups pushed back quickly. Mike Gavin of the Alliance for Higher Education said "the administration's latest rules changes are its most blatant attack to keep working class Americans and people of color from accessing higher education and a better life." The proposal lands alongside a separate, monthslong run of Justice Department Title VI findings against race-conscious admissions at Yale, UCLA, Duke Law, and George Washington's medical school — but this time the enforcement lever is a college's tax bill, not a lawsuit.
DOJ's Title VI investigations forced individual schools to defend individual admissions cycles. This rule skips the case-by-case fight entirely — it puts every private college's tax-exempt status, and its ability to accept tax-deductible gifts, on the line at once. That's a much bigger incentive to move fast than a single federal letter, and it will land on financial aid offices as hard as it lands on admissions offices.
For applicants, the direct effect is limited: nothing here changes what you submit or how your file gets read this cycle. The indirect effect is the one to watch. Race-targeted scholarships and affinity programs that schools have already been quietly renaming or opening to all applicants under DOJ pressure now have a much harder financial deadline to finish that process by.
The rule targets race, not income or first-generation status — need-based financial aid and first-gen outreach aren't what's being regulated here. If anything, colleges under pressure to prove their processes are race-neutral may lean harder on need- and merit-based criteria to signal compliance, which keeps the advice from our earlier DOJ coverage exactly the same: grades, scores, and concrete accomplishments are the inputs that hold up under this kind of scrutiny.
A scholarship or club getting renamed isn't the story — whether its eligibility criteria actually changed is. Before you count on a "diversity" or "equity" program as part of your financial plan for a school, check its current, published eligibility rules rather than assuming last year's version still applies. With a compliance deadline now on the books for 2027, that list is going to keep shifting through this admissions cycle and the next.
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