WASHINGTON, D.C. — The Treasury Department and Internal Revenue Service proposed rules Sept. 3 that could force as many as 18,000 tax-exempt private schools to eliminate race-based admissions, scholarships and other programs or risk losing their federal tax exemptions beginning in 2027.
The proposal would apply a uniform nondiscrimination standard to private primary and secondary schools, colleges, universities, professional schools and trade schools organized under Section 501(c)(3). It would cover policies involving admissions, financial aid, athletics and other school-administered or supported programs.
The rule represents a potentially significant change for schools that use race, color, or national or ethnic origin when distributing scholarships or other benefits. Treasury and the IRS estimate about 750,000 students attend affected institutions and may qualify for scholarships allocated using racial, ethnic or national-identity criteria.
Under the proposal, discrimination for any purpose would be inconsistent with federal tax-exempt status, including policies intended to promote diversity or remedy past discrimination. That would eliminate provisions in existing IRS guidance that permit certain preferences for racial minority groups when designed to advance a school’s nondiscriminatory policy.
Treasury and the IRS tied the proposed standard to a body of federal law and Supreme Court precedent that includes Brown v. Board of Education, Bob Jones University v. United States and the 2023 Students for Fair Admissions decision. Federal tax policy has long conditioned private-school tax exemptions on compliance with the country’s fundamental public policy against racial discrimination.
The proposal goes beyond simply restating that prohibition by specifying that race-based treatment intended to advance remedial or diversity objectives would also count as discrimination for purposes of determining eligibility for a Section 501(c)(3) exemption.
Treasury Secretary Scott Bessent said schools cannot preserve favorable tax treatment by characterizing race-based preferences as equitable or diversity-enhancing.
“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Bessent stated.
Schools could continue directing assistance toward disadvantaged students through race-neutral criteria, including family income, geography, first-generation status, individual hardship, military-family status and academic achievement.
The proposed regulations also would not prevent religious schools from maintaining religious missions, curricula or observances or from selecting students based on genuine religious affiliation or membership, provided the criteria are based on religion rather than race or shared ancestry.
The financial impact is expected to fall most directly on scholarship and loan programs. Treasury and the IRS said schools could incur legal and administrative expenses when changing race-based scholarships, particularly endowed awards whose donor restrictions expressly require racial or ethnic eligibility criteria.
The agencies said restricted endowments of all types account for no more than 16% of scholarship dollars. For other programs, schools could substitute criteria such as income or geography without significant compliance costs, according to the regulatory analysis.
Treasury and the IRS expect nearly all affected schools to change their scholarship and loan criteria rather than surrender their tax exemptions. The agencies said the overall amount of scholarships and loans and the number of recipients are not expected to change, although the composition of recipients could shift.
The agencies also anticipate little overall effect on charitable giving, reasoning that donors seeking to assist particular populations could instead finance scholarships using permissible criteria such as income, geography or first-generation status.
The proposed rule is not yet final. Treasury and the IRS expect to complete the regulations before May 31, 2027, after considering public comments, with the requirements applying to private-school taxable years beginning after that date.
Comments and requests for a public hearing are due Nov. 3. The proposal is identified as REG-119986-25 and was published in the Federal Register as Document 2026-18127.
Public comments may be submitted through Regulations.gov using IRS and REG-119986-25.
Support the local news that supports Chester County. MyChesCo delivers reliable, fact-based reporting and essential community resources—free for everyone. If you value that, click here to become a patron today.