Why the Trump administration’s bid to end diversity efforts at nonprofit schools is likely to get tied up in court

The Trump administration wants to strip all nonprofit colleges, universities and private K-12 schools of their tax-exempt status if any of their programs designed to help students uses race as a criterion for eligibility.

This change is included in a rule the Treasury Department and Internal Revenue Service proposed on Sept. 3, 2026. The rule could take effect after May 31, 2027, following a two-month-long comment period – as long as it’s not blocked or delayed by the legal challenges likely to arise.

As a nonprofit law scholar who helps nonprofit leaders understand the legal issues they face, I believe this latest salvo in the Trump administration’s attempt to end racial preferences stretches U.S. law so far that it will likely be tied up in court for years.

What is the Trump administration aiming to do?

The proposed rule states that private schools aren’t eligible for tax-exempt status if they have any school-administered or -supported program that “discriminates on the basis of race, color, or national or ethnic origin … for any purpose.”

The regulations do not define the word “discriminate” in this context, but Treasury Secretary Scott Bessent has made clear that the Trump administration considers programs that have diversity goals to be a form of discrimination.

Private K-12 schools, colleges, universities and professional and trade schools would be subject to this rule, including all academic and athletic programs as well as all scholarships and admissions policies having anything to do with efforts to increase diversity.

The proposed rule would not apply to religious schools that make admitting people who adhere to the school’s religion a priority. Nor would it apply to public universities, but I believe the language is broad enough to apply to the foundations that provide scholarships to students at public universities.

At this point, many key details about the rule remain unclear.

The IRS estimates that this rule would affect 18,000 private schools attended by 750,000 students at all levels of instruction.

All private schools that are nonprofits depend on this tax exemption, both to save money on income and property tax bills and to attract donations. Without these benefits in place, tuition bills at nonprofit schools could skyrocket and the financial pressures many colleges and universities already face would increase.

Americans gave about US$92 billion in charitable donations to private schools in 2025, which mostly supported higher education. That funding covers an average of about 10% of college and university budgets.

A change in the rules could also complicate schools’ relationships with their donors, alter the distribution of scholarships and lead to significant legal bills, as the government itself has acknowledged.

What rationale has the administration provided?

The proposed rule hinges on the Trump administration’s definition of racial discrimination: that any kind of racial preference is wrong and grounds for terminating government support – even when it’s meant to address past injustices, like the decades of systemic discrimination that followed the end of slavery in the United States.

The IRS’ explanation of this rule alludes to many legal precedents, including two significant U.S. Supreme Court decisions.

With its Bob Jones University v. United States ruling, the court found in 1983 that a university banning interracial dating and marriage provided the IRS with the legal grounds to revoke its tax-exempt status.

And the court found in 2023, in its Students for Fair Admissions v. Harvard ruling, that colleges and universities that accept government funding cannot consider race in their admissions policies without violating the equal protection clause of the Constitution.

Does the federal government have this authority?

There is evidence that the government lacks the authority to implement this proposed rule.

Educational groups, such as EdTrust and the American Association of University Professors, have expressed their opposition to the proposed changes. Legal scholars, such as Philip Hackney, Ellen Aprill, Daryll Jones and Brian Galle, have explained why the rule is likely illegal.

Two courts found on June 30, 2026, that the Department of Education did not have the authority to alter student loan forgiveness rules for the employees of nonprofits. I expect to see opponents of the proposed rule to use those cases to support this argument.

Even if the courts determine the IRS does have authority to issue this rule, they will have the final say as to whether the agency has interpreted congressional intent correctly.

Legal scholars are also saying that the Trump administration’s interpretation of prior Supreme Court cases regarding discrimination at schools with tax-exempt status is incorrect.

They point out that the Harvard admissions case was limited to colleges and universities that accepted public funding, and it provided some narrow exceptions. The proposed regulation would apply to all private schools, without exception, even if they don’t receive federal funding.

Further, the Bob Jones ruling stressed that a nonprofit’s tax-exempt status could only be revoked on “fundamental public policy” grounds when the activity in question so shocked the community conscience that it undermined any other benefit the institution conferred. It based its opinion on 30 years of evidence from all three branches of government to show that this kind of prejudice violated fundamental public policy.

The Trump administration may be unable to show that the public’s perspective regarding diversity, equity and inclusion has changed that much. It faces numerous lawsuits challenging its definition of racial discrimination, and the American public remains overwhelmingly in favor of diversity, equity and inclusion policies.

Law professor Roger Colinvaux has also pointed out that interpreting the term “discrimination” to mean that organizations can no longer remedy past discrimination runs counter to the legal definition of the term “charitable,” which means to help those in need. Treasury Department regulations define charitable activities as helping “the poor and disadvantaged” and eliminating “prejudice and discrimination.”

Finally, as Alexander Reid, a prominent attorney who specializes in tax exemptions, noted in a letter to the IRS, the proposed rule raises significant First Amendment issues of freedom of speech, religion, association and institutional autonomy. That’s because it would affect choices that all private schools make that are essential to their identities and expression of ideas.

What’s at stake?

Two years ago, the federal government supported a definition of racial discrimination that is vastly different from the definition the Trump administration now holds, and a new administration could come up with still another meaning. The lawsuits that will surely challenge this proposed rule will help to determine the legal meaning of racial discrimination – and Congress could weigh in as well.

In the meantime, many nonprofit schools may end their programs that are designed to address the results of past discrimination out of a fear of potentially losing their tax-exempt status.

I would not be surprised to see other kinds of nonprofits taking similar precautions as well, on the assumption that the Trump administration will apply this logic more broadly in the future.

The IRS will need to respond to the major themes addressed in the comments it receives by Nov. 3, 2026. It may change the rule before it issues a final version.

And even if the rule were to be finalized on schedule, I would expect extensive litigation could delay or prevent its implementation.