Trump proposes stripping tax-exempt status from schools considering race in admissions

The Trump administration has proposed a sweeping Treasury and IRS rule to strip tax-exempt status from an estimated 18,000 private schools and universities that consider race in admissions, scholarships, or academic programs. Scheduled to take effect on May 31, 2027, the policy targets diversity, equity, and inclusion initiatives, threatening the financial stability of institutions like Harvard and historically Black colleges. Opponents, including the American Association of University Professors, are preparing legal challenges, arguing the rule weaponizes civil rights laws against marginalized students.

IRS tax-exempt status proposal

• ▪The U.S. Department of the Treasury and the Internal Revenue Service proposed a new rule on September 3, 2026, to deny tax-exempt status to private schools that consider race in admissions, scholarships, or other programs
• ▪The proposed Treasury rule allows private schools to assist disadvantaged students using race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, or academic achievement
• ▪The proposed Treasury rule would not prevent religious schools from maintaining a religious mission or selecting students based on religious affiliation
• ▪If finalized, the proposed Treasury and Internal Revenue Service regulation would take effect on May 31, 2027

DEI program elimination campaign

• ▪The U.S. Justice Department has opened separate investigations into several medical schools accused of favoring Black and Hispanic students in admissions
• ▪Treasury Secretary Scott Bessent stated that schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature
• ▪The Trump administration has utilized Civil Rights-era laws to pressure universities into shutting down or rebranding diversity, equity, and inclusion offices, scholarships, and clubs

Affected schools nationwide

• ▪The loss of tax-exempt status would prevent donors from claiming tax deductions on gifts to non-compliant schools and prevent schools from selling tax-exempt bonds
• ▪The U.S. Department of the Treasury and the Internal Revenue Service estimate that the proposed rule could affect up to 18,000 private elementary, secondary, and post-secondary schools
• ▪The Trump administration previously targeted Harvard University with funding freezes, investigations, and threats to its tax-exempt status, which Harvard officials argued would force cuts to financial aid and medical research

Race-based scholarships targeted

• ▪The proposed regulation would require non-compliant institutions to work with donors to establish alternative, race-neutral eligibility criteria for scholarship recipients to retain tax-exempt status
• ▪The U.S. Department of the Treasury estimates that the proposed rule could affect 750,000 students who may qualify for race-based scholarships

HBCU funding concerns

• ▪The proposed rule could have stark financial implications for historically Black colleges and universities, which currently hold tax-exempt status
• ▪Historically Black colleges and universities previously received a financial boost from the Trump administration despite its broader efforts to gut diversity, equity, and inclusion funding

Anticipated legal challenges

• ▪The American Association of University Professors is considering legal action to block the proposal, with President Todd Wolfson calling it an attempt to turn civil-rights law against the people it was enacted to protect
• ▪Legal experts and civil rights advocates anticipate the proposed Treasury rule will face immediate court challenges following the public comment period

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