AGB Policy Alert: Treasury and IRS Propose New Tax-Exempt Rules for Private Colleges and Universities

On September 4, 2026, the U.S. Department of the Treasury and Internal Revenue Service (IRS) published a proposed rule that could significantly affect the federal tax-exempt status of private nonprofit colleges and universities. Under the proposal, a private nonprofit school would not qualify for tax exemption under Section 501(c)(3) if it adopts, maintains, or enforces certain policies or practices that consider race, color, or national or ethnic origin. Treasury and the IRS propose treating such policies as discriminatory for purposes of determining federal tax-exempt status, including in admissions, scholarships and loans, athletics, and other school-administered or school-supported programs.

The proposed rule is not final, and comments are due November 3, 2026. If finalized, the regulations would apply to taxable years beginning after May 31, 2027. Private nonprofit institutions should assess the potential implications now, while public institutions and systems should consider how the proposal could affect partnerships, joint programs, scholarships, and other relationships involving private nonprofit educational (both K-12 and higher education) institutions.

Key Provisions

Proposes a New Standard for Race-Conscious Policies and Tax-Exempt Status

• The proposal would provide that a private school cannot qualify for Section 501(c)(3) status if it uses race, color, or national or ethnic origin as a criterion in educational, admissions, scholarship or loan, athletic, or other school-administered or school-supported programs.
• Treasury and the IRS would treat such practices as discriminatory for purposes of Section 501(c)(3), regardless of their purpose or intent, including when designed to advance remedial or diversity-related objectives.

Would Change Longstanding IRS Guidance Concerning Race-Conscious Programs

• Current IRS guidance under Revenue Procedure 75-50 permits certain policies and financial-aid programs favoring racial minority groups when designed to promote a school’s racially nondiscriminatory policy.
• The proposal would remove those provisions, meaning that admissions, scholarship, loan, and other programs using race, color, or national or ethnic origin as a criterion could jeopardize an institution’s tax-exempt status.

Raises Significant Financial and Philanthropic Implications

• An institution that loses Section 501(c)(3) status would become subject to federal income tax, and contributions to the institution would generally no longer be tax deductible.
• Treasury and the IRS estimate that the proposal could affect approximately 18,000 private elementary, secondary, and postsecondary schools and approximately 750,000 students who may qualify for scholarships allocated on the basis of racial, ethnic, or national identity.

Public Institutions Are Generally Excluded, But Partnerships Warrant Review

• The proposed definition of a “private school” expressly excludes governmental units, their agencies or instrumentalities, and organizations owned or operated by them. Public colleges and universities that fall within those categories therefore would not be directly subject to the proposed rule.
• However, public institutions and systems should evaluate programs and relationships involving private nonprofit colleges and universities and any K-12 private schools, particularly joint academic programs, consortia, scholarships, athletics arrangements, and other collaborative initiatives, to understand whether the proposal could affect their private partners or the structure of those relationships.

Adds new policy-sensitive grant compliance requirements.

• Grantees would be required to ensure that grant-related hiring, admissions, promotions, participant selection, and compensation decisions are based on “merit and high standards” without regard to specified protected characteristics or their proxies, subject to certain exceptions.
• Grantees would also have to ensure that employment practices do not compel statements supporting or opposing political views and that applicable policies protect freedom of speech, inquiry, and the press.
• Certain grantees would additionally be required to use federal funds in accordance with executive orders.
• Terms such as “merit,” “proxies,” and “compelled statements” may require further clarification. Institutions may also need to reconcile the provisions with existing policies on employment, admissions, academics, free expression, civil rights, and grant compliance. Incorporating executive orders could create additional uncertainty as federal priorities change.

Moves federal grant notices primarily to Grants.gov.

• ED would eliminate requirements to publish certain grant notices, annual priorities, maximum award amounts, and intergovernmental review information in the Federal Register.
• Grants.gov would become the primary source for funding opportunities. Applicants claiming nonprofit status would also be required to submit supporting documentation.

Call to Action: Review the Proposal and Consider Commenting by November 3

Why It Matters

The proposal represents a potentially significant change in how the federal government would evaluate race-conscious policies and programs for purposes of federal tax-exempt status. It would extend across admissions, scholarships, financial aid, athletics, and other school-supported activities, including programs that may have been developed for remedial or diversity-related purposes or structured in reliance on existing IRS guidance.

For private nonprofit colleges and universities, the stakes are substantial. Loss of Section 501(c)(3) status could affect taxation, fundraising, donor relationships, financial aid, and institutional operations. Although public institutions are generally excluded, their relationships with private nonprofit educational partners may also warrant careful review.

Boards should:

• Review admissions, scholarship and loan programs, athletics, educational policies, and other institution-administered or supported programs to understand how they could be affected if the proposed rule is finalized.
• Assess donor-restricted funds and scholarships that contain race-, ethnicity-, or national-origin-based eligibility criteria and determine what options may be available if the rule is finalized.
• Evaluate the potential financial, tax, fundraising, and operational consequences of any challenge to the institution’s Section 501(c)(3) status.
• Identify partnerships and joint programs with private nonprofit educational institutions that could be affected, for public institutions and systems.
• Ensure that legal counsel, advancement and foundation leaders, financial officers, enrollment leaders, and other relevant administrators are coordinating their review.
• Determine whether the institution, system, or affiliated foundation should submit comments by November 3, 2026.