Trump DEI Tax Exemption Rule Could Put Thousands of Private Colleges at Risk
The Trump administration is moving to put the tax-exempt status of thousands of private colleges and schools on the line if they continue programs that provide certain benefits to students based on race.
The Treasury Department and Internal Revenue Service announced proposed regulations Thursday that would deny federal tax-exempt status to private educational institutions with policies or programs the administration considers racially discriminatory.
The proposal could affect as many as 18,000 private schools, colleges, universities, professional schools and trade schools nationwide. If finalized, the regulations would apply to taxable years beginning on or after May 31, 2027.
Race-based Scholarships and Programs Targeted
The proposed rule reaches beyond college admissions. It would apply to scholarships, financial aid, athletics, educational policies and other school-supported programs.
That could put programs created specifically to increase opportunities for Black, Hispanic and other historically underrepresented students under additional federal scrutiny.
Treasury Secretary Scott Bessent said programs would not escape the rule simply by operating under diversity, equity and inclusion language.
“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Bessent said.
The administration argues the change establishes a uniform nondiscrimination standard and aligns federal tax policy with recent Supreme Court decisions restricting the consideration of race in higher education.
Schools could still direct assistance toward disadvantaged students, according to Treasury, but would have to rely on race-neutral factors such as family income, geographic location, first-generation college status, individual hardship, military family status or academic achievement.
Critics say that interpretation could undermine programs intended to address longstanding racial disparities in access to higher education.
Mike Gavin, president and CEO of the Alliance for Higher Education, called the proposal an attack on educational opportunity for working-class students and students of color.
“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,” Gavin said, according to the Associated Press.
Colleges Have Already Pulled Back DEI Programs
The proposal marks another escalation in the Trump administration’s broader effort to eliminate DEI policies across American education.
Numerous universities have already closed or renamed diversity offices and changed scholarships, admissions policies and student programs as the administration has challenged the use of race in education.
Existing IRS guidance has historically required private schools seeking tax-exempt status to maintain racially nondiscriminatory policies. At the same time, that guidance has allowed some programs favoring racial minority groups when they were designed to promote a school’s broader nondiscrimination goals.
The administration now wants to eliminate those provisions. Current IRS guidance acknowledges limited circumstances in which minority-focused admissions, programs or financial assistance do not jeopardize a school’s exemption.
The proposed regulations would replace that approach with a stricter standard barring benefits based on race, color or national or ethnic origin.
Losing Tax-Exempt Status Could Carry a Major Financial Cost
Private universities have benefited from federal tax exemptions for generations because of their educational and charitable missions. Losing that designation could create significant financial consequences, including potential effects on donations that currently qualify for tax deductions.
Marjorie Hass, president of the Council of Independent Colleges, told the Associated Press that donations earmarked for scholarships could be particularly affected.
Tim Powers, vice president of the National Association of Independent Colleges and Universities, also warned that the proposal could create new legal and compliance uncertainty for institutions already attempting to follow federal civil rights requirements.
The federal government has rarely taken away a university’s tax exemption over racial policies.
One of the most prominent cases involved Bob Jones University, which lost its exemption after maintaining policies prohibiting interracial dating and marriage. The U.S. Supreme Court upheld the IRS action in 1983. The university later abandoned the policy and regained tax-exempt status.
The Trump administration is now relying in part on that precedent — along with Brown v. Board of Education and the Supreme Court’s decision restricting race-conscious college admissions — to argue that institutions receiving the federal tax benefit must comply with its interpretation of racial nondiscrimination.
The proposal must still move through the federal rulemaking process before becoming final.
