On September 3, 2026, the Treasury Department and IRS released proposed regulations that would strip tax-exempt status from private schools and colleges that maintain race-conscious admissions policies, scholarships, or diversity programs. Up to 18,000 institutions could be affected. If finalized, the rule takes effect after May 2027 — which covers the academic year that students applying this fall are planning to enter. Here's what families need to understand before this shapes the financial aid picture.

What the Rule Actually Proposes

The proposed regulation targets any policies or programs at private educational institutions that provide benefits to students based on race, color, or national or ethnic origin. That includes admissions, scholarships, and campus programming. The Treasury Department says those practices "would be incompatible" with federal tax-exempt status.1

The proposal makes no exceptions for remedial programs, diversity initiatives, or what the administration calls "benign" race-conscious policies. Treasury Secretary Scott Bessent said the rule was designed to "root out racial discrimination" in the U.S. education system.2

Up to 18,000 private schools, colleges, and other educational institutions could be reviewed under the rule. The comment period is open now; if the regulation is finalized, it takes effect after May 2027.

The Part That Affects Students Directly

Most news coverage focuses on what this means for college admissions. The more immediate question for families is what it does to scholarship funding.

Private colleges depend heavily on charitable gifts — from alumni, foundations, and major donors — to fund scholarship endowments. Those gifts are only tax-deductible because the institutions hold 501(c)(3) nonprofit status. Strip that status and a donor who might have given $500,000 to a scholarship fund loses the federal tax benefit that made the gift financially worthwhile.

Marjorie Hass, president of the Council of Independent Colleges, said the change would most likely affect donations, "which are often earmarked for scholarships."2

That's the path from federal policy to your financial aid offer: if major donors stop giving because the tax benefit disappears, scholarship endowments shrink — and scholarship offers to future students could shrink with them.

This proposed rule specifically targets scholarships and financial aid programs that consider race as a factor. If you are applying for fall 2027 and relying on diversity-focused scholarship aid at a private college, track this policy through the fall comment period. The rule, if adopted, takes effect after May 2027.

Public Universities Are Not the Target

Public universities operate under different legal structures and receive most of their funding through state appropriations, federal contracts, and student tuition — not charitable donations. The proposed Treasury rule applies specifically to private educational institutions that hold 501(c)(3) tax-exempt status.

Students choosing between public and private institutions should factor this into their research. It doesn't mean private colleges are suddenly unaffordable or inaccessible — but it's one more reason to evaluate them on actual net price, not sticker price.

What Students and Families Should Do Now

Don't panic — this is still proposed. The regulation is in a comment period, legal challenges are expected, and even if it's finalized, it doesn't take effect until after May 2027. Students already enrolled are not immediately at risk.

Evaluate your financial aid picture at private schools carefully. Understanding your award letter — specifically what aid is institutional grant money versus externally funded scholarship money — matters more now. Institutional need-based grants from a school's operating budget are far less exposed to a policy that affects donor behavior than scholarship funds built from charitable gifts.

Private colleges with large endowments and need-blind admissions policies tend to be more insulated. Schools that commit to meeting 100% of demonstrated financial need have built-in structures that don't depend on any single stream of charitable donations. You can find which schools lead on financial aid at our guide to colleges with the best financial aid.

If you're comparing two private schools — one with a $5 billion endowment and one with a $300 million endowment — their exposure to changes in donor behavior is not the same. Smaller private colleges with thinner financial margins and heavy reliance on annual giving are worth scrutinizing more carefully when evaluating how stable their scholarship offers will be over four years.

Apply for outside scholarships early. Scholarships funded by external organizations — foundations, community groups, employers — are entirely unaffected by this rule. Building your aid picture from multiple sources reduces your dependence on any single institution's policies. See our full guide on how to apply for scholarships for college.

Footnotes

  1. Fortune. (2026, September 3). Treasury proposes stripping tax-exempt status from private colleges with DEI policies. Fortune. https://fortune.com/2026/09/03/colleges-dei-trump-tax-exemption-wokeness/ ↩

  2. NPR. (2026, September 4). Trump administration pushes to remove tax exemption for private colleges with DEI policies. NPR. https://www.npr.org/2026/09/04/g-s1-141947/trump-administration-pushes-to-remove-tax-exemption-for-private-colleges-with-dei-policies ↩ ↩2