The Treasury Department and IRS have proposed a rule that could strip private schools, colleges, and trade schools of tax-exempt status if they use race-based preferences in admissions, scholarships, financial aid, or other school-supported programs. The proposal, described by Education Week on Sept. 3, would reach beyond campus policy and into the tax planning of donors who rely on charitable deductions.
For affluent households, the practical question is not only whether schools change their policies. It is whether gifts to a targeted institution would remain deductible if that institution ultimately lost its 501(c)(3) status. That is why this story matters after tax: the proposal puts a tax benefit attached to major philanthropy directly in play.
What Changed
Education Week reported that the proposed regulations would apply to private K-12 schools as well as colleges and trade schools. The rule would bar schools from considering race in an “educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or supported program.”
The same report said schools could still use race-neutral criteria, including family income, geographic residence, individual hardship, military family status, academic achievement, or first-generation status. Schools could also continue to select students based on religious affiliation.
The source from ИФЗ РАН said Treasury Secretary Scott Bessent and IRS Chief Executive Officer Frank J. Bisignano framed the proposal as a warning to private educational institutions that continue race-based preferences under diversity, equity, and inclusion programs. Education Week separately quoted Bessent saying, “Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.”
According to Education Week, Treasury said the proposal affects 18,000 educational institutions, and educators and advocates have 60 days to comment or request a public hearing.
Who Is Affected
The immediate targets are private educational institutions that use race-based preferences in admissions, financial aid, scholarships, or programming. But the financial exposure goes wider: donors, alumni, family foundations, and board members may all have an interest in whether a school keeps its tax-exempt status.
That matters because, as both sources note, donations to a tax-exempt school are generally deductible to the donor. If a school were to lose 501(c)(3) status, the donor-side economics of giving could change sharply. The ИФЗ РАН report also said legal costs could rise and bond issuance could become more expensive because tax-exempt status helps support lower borrowing costs.
Education Week added another layer. The proposed rule is scheduled to take effect after May 31, 2027, just months after a federal school choice initiative begins. That initiative, enacted as part of the One Big Beautiful Bill Act of 2025, lets taxpayers claim dollar-for-dollar federal tax credits of up to $1,700 by donating to scholarship-granting organizations in participating states, according to the publication.
In other words, the administration is simultaneously expanding one education-related tax incentive while proposing tougher tax-status consequences for some private schools. For donors, that creates a more fragmented giving landscape.
The After-Tax Math
The proposal is not final, and neither source provides a new IRS worksheet for how deductions would be disallowed if a school lost exempt status. But the broad tax implication is straightforward: a gift that may have produced a charitable deduction could become a nondeductible transfer instead.
Example: a household considering a $100,000 gift to a private college usually cares about the school mission, but also about the after-tax cost. If the institution remains a qualified charitable organization, the donation may be deductible, subject to the usual tax rules and limitations. If the institution later loses that status, a comparable future gift may no longer generate a charitable deduction at all.
| Illustrative gift | If institution keeps 501(c)(3) status | If institution loses 501(c)(3) status |
|---|---|---|
| $25,000 | May qualify as a charitable contribution deduction, subject to tax rules | May no longer be deductible |
| $100,000 | May qualify as a charitable contribution deduction, subject to tax rules | May no longer be deductible |
| $1 million | May qualify as a charitable contribution deduction, subject to tax rules | May no longer be deductible |
The same logic matters for planned capital campaigns and endowment gifts. A donor evaluating whether to fund a scholarship, building, or program often compares the net cost of giving across several charities. If one institution faces unresolved tax-status risk, some households may reassess timing, size, or structure of a gift.
Moves to Discuss With Your Advisor
This is not a final rule, and schools still have time to comment. Even so, households with pending large gifts may want to understand how exposed a recipient institution is.
- Review the recipient’s policies. The ИФЗ РАН report said race-targeted scholarship and program funds are likely to be a focal point for audits and lawsuits.
- Check the timing of major gifts. Education Week reported the proposed effective date as after May 31, 2027, which creates a known but still tentative window.
- Confirm giving-vehicle rules. The ИФЗ РАН report said donor-advised funds and community foundations may present complications if a school were to lose nonprofit standing and distributions could no longer go directly to that institution.
- Coordinate with boards and family foundations. Institutions and donors may need to monitor not just admissions policy, but scholarship design, program language, and public disclosures.
For many affluent families, the practical issue is governance as much as ideology. A large pledge can span several tax years, and the deductibility assumptions behind that pledge may be worth revisiting with a CPA or financial planner.
What to Watch Next
First, watch the rulemaking calendar. Education Week said stakeholders have 60 days to comment or ask for a hearing, so the next developments are likely to come through comments, revisions, or litigation threats rather than immediate enforcement.
Second, watch whether schools rewrite scholarships, admissions practices, or campus programs to fit the race-neutral criteria Treasury described. The same report said private schools could still pursue efforts to eliminate prejudice and discrimination as long as they do not privilege one race over another.
Third, watch for legal challenges. The ИФЗ РАН report pointed to the Bob Jones University precedent, in which the Supreme Court upheld the IRS revocation of tax-exempt status in 1983. Supporters of the current proposal see that case as a roadmap. Opponents argue the administration is stretching the Supreme Court’s 2023 affirmative-action ruling too far.
For now, the headline for donors is narrower but important: this is a proposed tax-law change with potentially large consequences for charitable write-offs tied to private education. Until the rule is finalized, the tax benefit attached to future gifts remains a point to monitor, not a settled fact.
Sources
- First reported Why The New Irs Push Against Private College Tax Status Changes Everything For Donors — ИФЗ РАН
- Trump Extends Anti-DEI Push to Private Schools, Eyeing Their Tax-Exempt Status — Education Week
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
