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A proposed Treasury and IRS rule could put private colleges and universities’ federal tax-exempt status at risk over race-based policies—including some scholarship and loan criteria. It is not a mass revocation of university exemptions: as of October 3, 2026, the measure remains a proposal, and its potential effect on donors depends on whether it is finalized, how it applies to a particular school, and the facts of a particular gift.
What Treasury and the IRS have proposed
In September 2026, Treasury and the IRS proposed regulations titled “Racial Nondiscrimination in Private Schools” (REG-119986-25). Under the proposal, a private school would not qualify for federal tax exemption under section 501(c)(3) if it discriminates on the basis of race, color, or national or ethnic origin in its admissions, educational policies, scholarships and loans, athletics, or other school-administered or school-supported programs.
The proposal covers private colleges and universities as well as K–12 schools and professional or trade schools. Its scope is therefore broader than college admissions. Treasury Secretary Scott Bessent argued that describing race-based preferences as equitable, inclusive, or diversity-enhancing would not change their discriminatory nature. That is the administration’s stated position, not a court ruling that settles every policy the proposal might reach.
When the proposal could apply—and what is not settled
The proposed regulations state that they would apply to taxable years beginning after May 31, 2027, a date the agencies expect to fall after final regulations are published. That is a proposed effective date, not evidence that the rule has been finalized. The proposal could change during the rulemaking process; as of October 3, 2026, schools have not lost exemption en masse under it.
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The agencies cite the Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard, which addressed admissions policies at Harvard and the University of North Carolina, as part of their rationale. The new proposal would apply the agencies’ interpretation beyond admissions to scholarships, loans, and other school policies. The Supreme Court did not itself decide the full scope of this proposed regulation.
Why charitable donors have a stake
Section 501(c)(3) concerns an organization’s federal tax-exempt status. Section 170 concerns whether a donor may claim a charitable-contribution deduction. IRS guidance generally links qualifying 501(c)(3) status with eligibility to receive tax-deductible contributions, but a donor’s deduction still depends on the applicable tax rules and the facts of the gift.
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That connection makes a school’s status relevant to donors, but it does not mean every contribution to every university is affected, or that a proposal automatically reverses deductions donors already claimed. The concern is prospective and conditional: if the rule is finalized and a school were to lose qualifying status, the school’s ability to receive deductible contributions could be affected. The proposal does not establish that any particular institution will lose exemption or determine the treatment of an individual donor’s past or future gift.
Scholarship and loan gifts are a specific concern
The agencies say the proposal may affect donors who support scholarships or loans administered by private schools when race, ethnicity, or national origin is part of the eligibility criteria. Treasury and the IRS estimate that the proposal may affect 18,000 private educational institutions and 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity. Those are estimates of potentially affected institutions and students—not counts of schools that will lose exemption, students who will lose aid, or donors whose deductions will change.
The agencies say they lack readily available data to quantify donors who contribute to affected scholarship funds. The possible effect on such giving is a concern identified by the agencies, not a quantified forecast that charitable donations will fall by a particular amount.
How the endowment tax differs
University endowment tax discussions concern a separate tax on investment income. A revised endowment excise tax begins in tax year 2026, according to the Congressional Research Service’s January 2026 report. It is not the same as a school losing 501(c)(3) status, and it does not by itself answer whether a donor may claim a section 170 deduction.
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| Question | Proposed 501(c)(3) rule | Revised university endowment excise tax |
|---|---|---|
| What is at issue? | Whether a covered private school qualifies for federal income-tax exemption. | A tax on qualifying university endowment investment income. |
| Who may be directly affected? | Private schools within the proposal, including colleges, universities, K–12 schools, and professional or trade schools. | Institutions that meet the endowment-tax rules and thresholds; the thresholds and rates are not stated here (Congressional Research Service, January 2026). |
| Timing identified in the sources | Proposed for taxable years beginning after May 31, 2027, if finalized; the date is not a final rule. | Revised tax begins in tax year 2026. |
| How does it relate to a donor? | Potentially relevant to deductible giving and school-run restricted scholarship funds; individual deductions depend on applicable rules and facts. | Directly concerns institutional investment income, not the donor’s section 170 deduction. |
What donors can check before making a restricted gift
A proposal is not a reason to assume that a school has lost its status or that a gift is no longer deductible. Donors considering a scholarship or loan fund with eligibility restrictions can ask the recipient institution how the fund is administered and how it assesses the applicable tax and legal requirements. For a substantial or specially restricted gift, a donor can also seek advice from a qualified tax professional or attorney about the specific gift and current law.
Treasury and the IRS have put schools on notice of their intended approach; IRS Chief Executive Officer Frank J. Bisignano said schools that continue racial discrimination should expect to lose that status. The practical stakes for donors are real, particularly where a gift is tied to a school-administered scholarship, but the proposal’s final text, application, and consequences remain unresolved as of October 3, 2026.
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