And administration officials say schools will not be able to escape scrutiny simply by describing race-based practices with terms such as “equity,” “inclusion,” or “diversity.”
“Under President Trump, this Administration is standing up for America’s students by ensuring racial discrimination has no place in American education,” Treasury Secretary Scott Bessent said. “Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.”
The proposal comes three years after the Supreme Court’s landmark 2023 decision sharply restricting the consideration of race in college admissions.
Since that ruling, the national battle over affirmative action has increasingly shifted away from explicit racial preferences and toward questions about how schools design admissions criteria, scholarships, student programs and other policies.
The Trump administration is now signaling that it intends to examine the substance of those programs rather than simply the terminology schools use to describe them.
IRS Chief Executive Frank Bisignano delivered an equally stark warning about what could happen to institutions found to be engaging in prohibited discrimination.
“Private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status,” Bisignano said. “Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”
That could carry enormous financial consequences.
Federal tax exemption is central to the business model of many private universities and nonprofit schools. It affects taxation of institutional income and can also make qualifying donations deductible for donors.
For wealthy universities sitting on enormous endowments, losing 501(c)(3) status could therefore become far more than a symbolic punishment.
Proposed Rule Reaches Far Beyond Admissions
The administration’s proposal does not focus exclusively on who gets accepted into a school.
It potentially reaches numerous programs and policies administered or supported by private educational institutions.
“Under the proposed rule, a private school would not qualify for Federal tax-exempt status under section 501(c)(3) if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin,” a press release stated. “The rule would apply across admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program.”
That language dramatically raises the stakes for institutions that embraced diversity, equity and inclusion initiatives in recent years.
Schools would still be able to distinguish among applicants using numerous race-neutral considerations, including academic performance, economic circumstances, first-generation status, geography and military-family background.
What they could not do, under the administration’s interpretation, is use those otherwise lawful programs as a disguised mechanism for racial discrimination.
The rule is slated to take effect May 31, 2027.
A Supreme Court Case From the 1980s Looms Large
The administration’s approach also draws attention back to one of the most significant disputes in the history of tax-exempt education: Bob Jones University v. United States.
The IRS revoked Bob Jones University’s tax exemption after concluding that the South Carolina school’s racially discriminatory policies conflicted with established public policy.
Bob Jones University prohibited interracial dating and marriage among its students.
The dispute eventually reached the Supreme Court, which ruled 8-1 in 1983 that the government could deny tax-exempt status to private educational institutions whose racially discriminatory practices violated fundamental public policy.
That precedent creates an intriguing political reversal in today’s affirmative-action fight.
For decades, supporters of aggressive government action against racial discrimination pointed to Bob Jones as evidence that nonprofit status was not an unconditional entitlement.
The Trump administration is now invoking that same basic principle from the opposite direction: If racial discrimination can cost a school its tax exemption, officials argue, the rule should apply regardless of which racial group benefits from a discriminatory policy.
In other words, calling a racial preference “diversity” does not automatically place it beyond federal scrutiny.
Universities Face a Potential Financial Hammer
The implications could be particularly serious for America’s richest private universities.
Institutions such as Harvard oversee endowments worth tens of billions of dollars and operate within a nonprofit structure that provides significant federal tax advantages.
The administration’s proposal effectively gives schools a choice: design programs around race-neutral factors or risk a confrontation with the IRS over whether their practices violate federal standards.
That means universities can continue pursuing socioeconomic diversity without directly sorting students according to race.
They can prioritize poor students.
They can consider whether an applicant is the first person in his or her family to attend college.
They can consider geographic background, academic accomplishment and other neutral criteria.
But the Trump administration is drawing a bright red line around race itself.
For universities that spent years building sprawling DEI bureaucracies and defending race-conscious approaches to admissions and campus programs, the message from Washington is unmistakable.
The Supreme Court already transformed the legal landscape for admissions in 2023.
Now Trump’s Treasury Department is threatening to put something even more valuable on the line: the tax advantages underpinning America’s private educational establishment.
