The Trump administration’s latest move against DEI in education could strike a costly blow to private colleges and universities.
Private institutions could lose their federal tax-exempt status for any policy or campus initiative that directly addresses a student’s race, color, nationality or ethnic origin, according to a proposed regulation from the Department of the Treasury and the Internal Revenue Service.
The rule would apply across every facet of a school—admissions practices, athletics, academic programming and financial aid—and spans both K12 and higher education, including primary and secondary schools, colleges and professional and trade schools.
Treasury and the IRS estimate the proposal could affect roughly 18,000 private educational institutions.
“Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status,” Frank J. Bisignano, CEO of the IRS, said in a press release.
Federal officials argue that Students for Fair Admissions v. Harvard, the Supreme Court’s 2023 ruling that banned affirmative action, provides legal precedent for this proposed ruling.
The Trump administration has launched numerous investigations into what its officials consider racial discrimination across K-12 and higher education and, in some cases, have frozen or withheld hundreds of millions of dollars in federal research funding.
How this tax-exempt status can hurt school finances
The regulation carries widespread and potentially devastating impacts on a private school’s existing finances and fundraising efforts.
- Private K12 and postsecondary schools will have to eat legal and administrative costs to meet policy compliance.
- Donors will no longer be eligible to offer money to enhance campus diversity efforts that focus on race or ethnicity.
- Money already donated to a school with a direct letter of intent on race-based initiatives will have to be altered with donor party approval, costing a school valuable time and resources.
College advancement teams are already under massive pressure to offset declines in federal research support, a financial challenge that has strained budgets.
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Tax-exempt status offers a laundry list of benefits, according to Forbes. Schools can issue bonds at lower interest rates and don’t have to pay taxes on investment income. If a school were to lose this status, borrowing costs would rise and financial investments would face annual tax deductions.
A non-tax-exempt school would likely see a drop in fundraising as well, since donors would no longer be able to claim their gift as a tax write-off.
These regulations are expected to be finalized by May 31 and applied in the subsequent taxable year. They will not affect campus initiatives focused on low-income and first-generation students or religiously affiliated institutions.
