Treasury Proposed Rules for Private School Tax Exemptions

The Treasury Department issued a regulation to remove tax-exempt status from schools using race in aid decisions.

Updated on Sept. 18, 2026 in Financial Aid

Bold flat-color editorial illustration depicting a monolithic stone plinth beside an architectural column, symbolizing institutional oversight. — The Treasury Department proposed new regulations that would eliminate federal tax-exempt status for private schools that consider race in scholarship or admissions decisions. AI Illustration. Upload story photo >

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Should private colleges be allowed to consider race or national origin when awarding student scholarships?

The Treasury Department and IRS announced a proposed regulation on September 3 that would strip tax-exempt status from private schools considering race or national origin in their programming. This rule targets 18,000 institutions across the United States.

Why it matters

The administration aims to end practices that support diversity, equity, and inclusion programs in private education. Institutions that prioritize race or national origin in scholarships or admissions will lose their 501(c)(3) status.

The proposed rule impacts 18,000 private educational institutions nationwide. Programs affected include scholarships, admissions, loans, and athletics, though race-neutral criteria like family income remain permitted.

The players

Treasury Department

This is the executive agency responsible for managing federal revenue and proposing tax regulations.

Scott Bessent

He is the Secretary of the Treasury who stated that diversity-enhancing programs remain subject to the new rule.

Internal Revenue Service

This agency is tasked with the enforcement of federal tax laws and the potential removal of 501(c)(3) status.

The details

Institutions would be forced to eliminate programs categorized as diversity-enhancing or face the loss of their federal tax-exempt status. While the rule takes effect in 2027, many colleges may alter their internal scholarship criteria sooner to avoid potential IRS scrutiny.

September 3: Treasury Department and IRS announced the proposed regulation.
November 3: Upcoming midterm elections occur.
May 31, 2027: The proposed effective date for affected tax years.

Culture Shift

This proposal marks a departure from established interpretations of Section 501(c)(3) of the Internal Revenue Code regarding school aid. It signals a shift in federal oversight of private institutional policy as the government moves to eliminate race-conscious practices.

Families relying on race-based scholarships for private school tuition may face a loss of funding as institutions pivot to race-neutral criteria. Students and parents should monitor school financial aid portals for updates on eligibility requirements ahead of the 2027 deadline.

The takeaway

Private schools must evaluate their current scholarship programs against these new regulatory guidelines to maintain their tax-exempt status. Families should prepare for potential changes to institutional aid packages as schools prioritize race-neutral criteria like income.