Treasury Proposes New Rules That Will Impact Nonprofit Status of Colleges

By Brett W. Johnson, Bill Ojile, and Carrie Schaffer

On September 3, 2026, the U.S Department of Treasury and the Internal Revenue Service (collectively “Treasury”) provided notice of a proposed rule, Racial Nondiscrimination in Private Schools, that, if promulgated, will impact private primary, secondary, and postsecondary educational institutions.

The rule would remove 501(c)(3) tax-exempt status from a private school that fails to satisfy a proposed nondiscrimination requirement:

“A private school is not operated exclusively for exempt purposes if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program. For purposes of this section, discrimination on the basis of race, color, or national or ethnic origin includes any discrimination on the basis of race, color, or national or ethnic origin for any purpose.”¹

In justifying the need for the rule, Treasury discussed a line of cases extending from Brown v. Board of Education of Topeka, Kansas, 347 U.S. 483 (1954) to Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023) that discussed racial discrimination in admissions and covered topics such as affirmative action, as well as the Equal Protection Clause of the Fourteenth Amendment, the Civil Rights Act of 1964, and President Trump’s Executive Orders. Treasury stated that these provisions established the fundamental public policy of the U.S. cases that all forms of racial discrimination in education were contrary to that public policy, irrespective of intent or legality such as serving remedial or diversity-related objectives.  

The proposed rule would qualify race-based actions based on ameliorating societal discrimination as a form of discrimination.² An educational institution can take actions or adopt policies intended to eliminate prejudice and discrimination, provided it achieves these purposes by means other than actions or policies that discriminate on the basis of race, color, or national or ethnic origin.³ Treasury defined geographic, income or first-generation student status as permissible criteria.⁴ The proposed rule would also not preclude a private school from maintaining a religious mission, curriculum, or program of observance, or from selecting students on the basis of religious affiliation or membership.⁵

The proposed rule is estimated by Treasury to impact 18,000 private schools that currently enroll approximately 750,000 students.⁶ Treasury will accept comments from interested parties over the next 60 days.