The Trump administration moved Thursday to make federal tax exemption contingent on a sweeping new interpretation of racial nondiscrimination in private education, proposing regulations that could strip 501(c)(3) status from schools that use race in scholarships, admissions, student services or other programs.

The Treasury Department and Internal Revenue Service said the proposal would apply to private primary and secondary schools, colleges, universities, professional schools and trade schools. Treasury estimates that as many as 18,000 tax-exempt private educational institutions could fall within the rule’s scope.

Under the proposed regulation, a private school would not qualify as a tax-exempt charitable or educational organization if it “discriminates on the basis of race, color, or national or ethnic origin” in the administration of educational, admissions, scholarship, athletic or other policies. The proposal is formally titled “Racial Nondiscrimination in Private Schools” and was scheduled for publication in the Federal Register on Sept. 4.

The administration argues that federal tax benefits should not support educational practices it considers racially discriminatory. Treasury Secretary Scott Bessent said in announcing the proposal that describing race-based preferences as diversity or inclusion efforts does not alter their legal character under the administration’s interpretation.

The rule would go beyond college admissions. It specifically reaches scholarships and loans, athletics, facilities and other school-supported programs. That could force private institutions to examine financial-aid funds, fellowship programs, mentoring initiatives and other benefits that explicitly use racial, ethnic or national-identity criteria.

The proposed regulations also state that race-based actions designed to remedy broader societal discrimination would count as discrimination for purposes of the tax rule. That provision is particularly significant because some scholarship and access programs have historically been justified as attempts to address unequal educational opportunity rather than as preferences in competitive admissions.

At the same time, Treasury says schools would remain free to expand access using criteria that do not classify applicants or students by race. The agency specifically identifies family income, geographic location, first-generation college status, individual hardship, military-family status and academic achievement as examples of permissible race-neutral considerations.

The distinction could accelerate a shift already underway in higher education since the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard and a companion case involving the University of North Carolina. Those rulings sharply restricted the use of race in college admissions. Many institutions have since redesigned admissions practices, scholarships and diversity initiatives while attempting to remain compliant with federal law.

The Treasury proposal would use a different legal lever: the federal tax code. Section 501(c)(3) generally exempts qualifying charitable and educational organizations from federal income tax, while other provisions allow taxpayers to deduct eligible charitable donations subject to applicable limits. Losing exempt status therefore could create both direct tax costs for an institution and indirect fundraising consequences if contributions no longer qualify for the same charitable deduction treatment.

The administration grounds its proposal partly in Bob Jones University v. United States, the 1983 Supreme Court decision that upheld the IRS’s authority to deny tax-exempt status to private schools engaged in racial discrimination. In that case, the court concluded that institutions operating contrary to a fundamental public policy against racial discrimination were not entitled to charitable tax benefits.

Treasury now argues that later legal developments, including the 2023 affirmative-action decision, support a broader and more uniform nondiscrimination rule. The proposed regulation cites Brown v. Board of Education, Bob Jones and Students for Fair Admissions as part of the legal foundation for the change.

That interpretation is likely to become a central issue during the rulemaking process and in any eventual litigation. Legal scholars and higher-education advocates quoted by major U.S. news organizations have questioned whether the administration can extend the reasoning of the affirmative-action cases from admissions to the much broader universe of scholarships, support programs and institutional policies through tax regulations. Supporters of the proposal argue that a single race-neutral standard is necessary to prevent institutions from recreating prohibited preferences under different program names.

The proposal is not an immediate revocation of any school’s tax status. It is a notice of proposed rulemaking, meaning Treasury and the IRS must receive and consider public comments before adopting final regulations. The Federal Register document says comments and requests for a public hearing are due 60 days after publication. A hearing would be scheduled if properly requested by a timely commenter.

The government says it expects to finalize the regulations before May 31, 2027. If finalized as proposed, they would apply to private-school taxable years beginning after that date, giving institutions time to review and modify admissions, scholarship and other policies.

Treasury’s economic analysis says approximately 750,000 students attending affected schools may qualify for scholarships allocated on the basis of racial, ethnic or national identity. That estimate underscores the practical stakes for students as schools decide whether existing restricted scholarships can be rewritten using socioeconomic or other race-neutral eligibility standards.

Religious schools would remain permitted to maintain a religious mission, curriculum and program of observance, and they could continue making decisions based on genuine religious affiliation where federal law permits. The proposal, however, would not create a religious exception allowing discrimination on the basis of race, color, or national or ethnic origin.

The initiative also marks an expansion of the administration’s broader campaign against diversity, equity and inclusion programs in education. Federal agencies have already scrutinized universities over admissions, scholarships and other race-conscious programs. The proposed Treasury rule adds the prospect of tax consequences even for private institutions whose dependence on direct federal education funding may be limited.

For colleges and independent K-12 schools, the immediate task is likely to be legal and financial review rather than abrupt program cancellation. Institutions will need to determine which programs explicitly classify students by race, which use broader eligibility criteria, and how much exposure they would face if the regulations survive the rulemaking process and potential court challenges.

The most consequential question remains unresolved: how broadly courts will allow the federal government to use the tax code to define prohibited discrimination after the Supreme Court’s affirmative-action ruling. Until the regulation is finalized and tested, schools face a proposed standard with potentially large financial consequences but significant legal uncertainty.