Trump Administration Moves to Strip Tax Exemptions From Private Schools Using Race-Based Aid

The proposed Treasury rule would extend the administration's anti-DEI policy into private education finance, creating potential legal and institutional consequences for thousands of schools and...

The U.S. Department of the Treasury proposed a regulation on Thursday that would remove tax-exempt status from private schools and universities that provide financial assistance to students based on race, according to reporting by Clarín citing the measure.

The proposed rule would affect institutions that direct race-specific aid toward Black, Hispanic, and other minority students. If finalized, the regulation would represent one of the most direct uses of federal tax policy to curtail diversity, equity, and inclusion programs at private educational institutions.

The Treasury Department's proposal is a regulatory change, not legislation, meaning it does not require congressional approval to advance. Proposed federal regulations are subject to a public comment period before finalization under the Administrative Procedure Act, and the rule's legal pathway would include review by the Office of Management and Budget.

The administration has framed the measure as part of a broader effort to eliminate what it describes as race-based preference programs across federally connected institutions. Earlier executive orders issued in 2025 directed federal agencies to end DEI programs within the federal government and to pressure federally funded contractors and grantees to do the same.

Tax-exempt status under Section 501(c)(3) of the Internal Revenue Code is a foundational financial benefit for nonprofit private schools and universities. Loss of that status would mean donations to those institutions would no longer be tax-deductible for donors, and the institutions themselves would become subject to federal income tax on revenues. The financial impact would vary significantly by institution size and endowment.

The move builds on a legal framework established in the 1983 Supreme Court case Bob Jones University v. United States, in which the court upheld the IRS's authority to revoke tax-exempt status from institutions whose practices conflict with established public policy. The administration's position appears to invert the logic of that precedent: where Bob Jones involved revoking exemptions for racially exclusionary practices, the current proposal targets institutions for racially inclusive ones.

Legal scholars and civil rights organizations have already flagged the tension with Supreme Court precedent. In its 2023 ruling in Students for Fair Admissions v. Harvard and University of North Carolina, the Supreme Court prohibited race-conscious admissions at colleges and universities receiving federal funding, but the decision did not directly address race-conscious financial aid programs. Whether race-based scholarships fall under that ruling's scope remains a contested legal question, and no definitive court ruling has resolved it as of the date of this article.

The practical scope of the rule is broad. Thousands of private colleges, preparatory schools, and universities maintain scholarship programs designated for students from specific racial or ethnic backgrounds, including programs funded by private donors. Whether donor-funded, internally administered aid would be covered by the proposed regulation is not fully specified in available reporting, and the text of the Treasury proposal would need to be reviewed to determine those boundaries.

The proposal arrives as the administration has also targeted federal funding streams connected to diversity programs in other sectors. The Trump administration's threat to cut federal funding for the Smithsonian Institution over similar diversity-related programming reflects a consistent pattern of using financial leverage rather than direct legislative prohibition to reshape institutional behavior.

Opposition from higher education associations and civil rights groups is expected during the public comment period. The American Council on Education and similar bodies have previously filed formal comments opposing administration actions affecting campus diversity programs. Whether any legal challenge would be filed before or after the rule is finalized is not yet known. The timeline for finalization of the rule has not been publicly announced by the Treasury Department.