IRS Rule Could End Race-Based Scholarships

On September 4, 2026, the U.S. Treasury and IRS published a proposed rule that would strip 501(c)(3) tax-exempt status from private schools, including colleges, that use race in admissions, scholarships, athletic recruiting, or other programs. The public comment period closed November 3, 2026. Treasury expects to finalize the rule before May 31, 2027, covering the 2027–28 academic year and beyond. If finalized as written, colleges that keep race-based scholarship programs would risk losing tax-exempt status, with broad consequences for donations and financial aid funding.

About 750,000 students currently receive scholarships tied to racial, ethnic, or national-origin criteria at private schools.1 If their college complies with the new rule, those awards could be restructured or eliminated. If the college refuses to comply, it risks losing its 501(c)(3) status, which means donors lose the ability to deduct contributions and the institution faces new tax liabilities.

The comment period for proposed rule REG-119986-25 closed six days ago.2 The next step is finalization.

What the Rule Actually Covers

Most news coverage has focused on admissions. The rule goes much further.

It would apply to any policy or practice involving race in:

  • Admissions criteria, test-score benchmarks, or recruitment targeting
  • Scholarships, grants, and financial assistance programs
  • Athletic recruiting and athletic awards
  • Summer enrichment programs, mentoring initiatives, and pre-college academies for students of a specific racial or ethnic group
  • Any other school-administered program, including research fellowships and clinical rotations

The rule would also eliminate longstanding safe harbors in IRS Revenue Procedure 75-50, which currently allow private schools to maintain minority-preference programs without jeopardizing exempt status. Those safe harbors would be deleted.

The rule applies to private schools that receive no federal funding. Many religious colleges and independent secondary schools believed that declining Title IV funds insulated them from federal mandates. Under this proposal, it does not. The 501(c)(3) exemption itself is what is on the line.

Who This Affects Right Now

Students applying for fall 2027 enrollment are the first cohort fully subject to the new standard, if Treasury finalizes on schedule. Institutions have roughly six months to decide whether to restructure race-based programs or challenge the rule in court.

Several law firm analyses flagged likely constitutional challenges. The rule expressly states that even practices that survive a strict-scrutiny legal analysis would disqualify a school from exemption. That goes beyond the 2023 Supreme Court decision in Students for Fair Admissions v. Harvard, which ended race-conscious admissions at colleges receiving federal funds but left space for race-neutral alternatives. This IRS rule closes that space for 501(c)(3) status purposes.

If you are counting on a named diversity or minority-focused scholarship at a private college, contact that school's financial aid office now — before scholarship criteria change. Schools are not required to notify deposited students if they restructure awards under regulatory pressure.

Three Things Most Coverage Misses

Schools with no federal money are still covered

A religious liberal arts college that refuses all Title IV aid to stay independent from federal regulation is not exempt from this rule. The 501(c)(3) status itself is at stake, not just federal funding eligibility.

Pipeline programs are explicitly in scope

A university-run summer program for Black or Latino high schoolers, a mentoring cohort for Indigenous college students, a pre-law academy restricted to first-generation students of color — all fall within the proposed rule's language. These programs are a major pathway into competitive colleges for students who lack prep-school networks. Organizations running them are watching the finalization closely.

A shift to need-based criteria is not necessarily a loss

Some colleges will likely respond by converting restricted scholarship endowments from race-based to income-based criteria. For students from lower-income families, that shift could actually open up awards they were previously ineligible for. Need-based scholarships are explicitly outside the rule's scope.

What to Do Now

If you have already received a race-based scholarship offer from a private college, ask the financial aid office two questions: First, is this award contingent on the college maintaining its current 501(c)(3) status? Second, if the scholarship criteria change, what happens to your award?

For students still searching for funding, merit scholarships and first-generation scholarships are generally structured around criteria other than race and are not affected by this rule. State need-based grants are also outside its scope; the 2027 scholarship deadline calendar lists state programs by deadline.

For context on how federal pressure on college programs has escalated, see the coverage of endowment tax proposals at elite colleges and DOJ admissions investigations at professional schools.

Watch for a final rule or a court injunction pausing it before spring 2027.

Footnotes

  1. U.S. Department of the Treasury & Internal Revenue Service. (2026, September 4). Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools. IRS.gov. https://www.irs.gov/newsroom/treasury-irs-move-to-end-tax-exempt-status-for-discriminatory-practices-in-private-schools ↩

  2. U.S. Department of the Treasury & Internal Revenue Service. (2026, September 4). Racial Nondiscrimination in Private Schools [REG-119986-25]. Federal Register. https://www.regulations.gov/document/IRS-2026-1189-0001 ↩