Overview

On September 4, 2026, the US Department of the Treasury and the Internal Revenue Service issued a Notice of Proposed Rulemaking (NPRM) titled “Racial Nondiscrimination in Private Schools” (REG-119986-25). The NPRM proposes to amend rules implementing Internal Revenue Code Section 501(c)(3) by adding new Treasury Regulation § 1.501(c)(3)-2, which would condition tax-exempt status for private educational institutions—including private colleges and universities—on compliance with a broad nondiscrimination requirement concerning race, color, and national or ethnic origin.

The proposed regulations would extend beyond admissions practices. The NPRM indicates that race-based distinctions in scholarships, financial-aid programs, athletics, and other institution-administered or institution-supported programs could be treated as prohibited discrimination, without regard to the private college or university’s intent or whether the practice is otherwise lawful under another legal framework.

The NPRM is a proposal and these regulations are not yet final. The regulations are subject to notice-and-comment rulemaking and may be revised before adoption. The regulations also may face legal challenges. Nevertheless, because the loss of Section 501(c)(3) status could have significant financial and operational consequences, private colleges and universities should closely monitor the rulemaking and begin assessing institutional practices that could be implicated if the proposal is finalized.

Public colleges and universities, including state institutions and community colleges, are not directly covered by the proposed definition of a “private school,” which excludes governmental units and their agencies and instrumentalities. Nevertheless, public institutions should take note of the NPRM because it reflects the federal government’s proposed approach to issues involving race, color, and national or ethnic origin. Public university foundations likewise should consider their own legal and operational circumstances, including whether any affiliated programs, scholarships, or activities warrant review under other applicable legal frameworks.

If finalized as proposed, the regulations would apply to taxable years beginning after May 31, 2027. For many private colleges and universities, the proposal therefore may require consideration well before the next regular cycle for reviewing admissions, financial-aid, donor-restricted scholarship, and student-program policies.

Legal Background

Section 501(c)(3) generally provides federal income-tax exemption for qualifying charitable and educational organizations, including many private colleges and universities in the United States. Under longstanding Supreme Court precedent, tax-exempt status may be unavailable to an educational institution whose practices conflict with a fundamental public policy of the United States. That race-based discrimination presents such a conflict was confirmed by the Supreme Court’s 1983 decision in Bob Jones University v. United States, which upheld the IRS’s denial of Section 501(c)(3) status to a private university that maintained segregationist policies related to students’ romantic relationships. The Supreme Court in 1976 also decided Runyon v. McCrary, which prohibited private schools from admissions practices that excluded students of certain races.

While it has long been established that race-based discrimination is a basis for removing tax exempt status, Rev. Proc. 75-50 has also long recognized certain safe harbors under which private schools could use race-conscious policies in admissions, facilities and programs, and financial assistance (including certain scholarships and loans) favoring racial minority groups without jeopardizing tax-exempt status, where the purpose and effect of those practices were to promote the establishment and maintenance of a racially nondiscriminatory policy as to students. The NPRM would remove those safe harbors, and prohibit all consideration of race in scholarships and admissions, regardless of its purpose. The remainder of Rev. Proc. 75-50 would remain in effect.

The NPRM also reflects the administration’s interpretation of the Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA). In SFFA, the Court held that the admissions programs at issue unlawfully considered race. Since that decision, the administration has relied on SFFA in executive actions and guidance addressing race-based scholarships, programs, and diversity, equity, and inclusion initiatives, and asserted that any consideration of race violates Title VI or other non-discrimination statutes.

The NPRM would not itself amend Title VI, Title IX, Section 504, the ADA, or other federal and state laws that may apply to public and private colleges and universities. Rather, it would establish an additional proposed condition for retaining tax-exempt status under Section 501(c)(3). For example, unlike federal civil rights laws, which apply to programs and activities receiving federal financial assistance, the proposed regulations would apply to covered private educational institutions regardless of whether they receive federal funding. The proposed IRS framework is therefore relevant to private colleges and universities that may not otherwise be subject to federal civil rights laws based on the receipt of federal financial assistance.

As a result, all private institutions of higher education should recognize that they may be subject to overlapping legal obligations and should avoid assuming that a development under one legal framework eliminates duties arising under another.

Summary of the Proposed Rules 

The NPRM would require private educational institutions seeking to maintain Section 501(c)(3) status not to: “adopt, maintain, or enforce any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in the administration of any educational policy, admissions policy, scholarship or loan program, athletic program, or other school-administered or school-supported program.”

The NPRM explains that discrimination would not be permitted “for any purpose,” and the NPRM indicates that the prohibition would apply regardless of the intent behind, or the legality of, the discrimination at issue.

As drafted, the proposed regulations could affect a range of practices at colleges and universities, including:

• Admissions policies and procedures;
• Scholarships, fellowships, grants, and other financial-aid programs;
• Student programs and services;
• Athletic programs;
• Institution-sponsored or institution-supported affinity-based programming and housing; and
• Other policies or practices that draw distinctions based on race, color, or national or ethnic origin.

The NPRM indicates that private colleges and universities could continue to maintain a religious mission, curriculum, or program of observance and may select students based on religious affiliation or membership. The preamble further indicates that a religiously based selection criterion would not constitute discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may share ancestry or ethnic characteristics, provided that the criterion is based solely on religion and not on shared ancestry or ethnic characteristics. The NPRM also states that private institutions may take actions or adopt policies intended to eliminate prejudice and discrimination, provided that those actions or policies do not themselves discriminate on the basis of race, color, or national or ethnic origin.

The proposed regulations are not final. Written or electronic comments, as well as requests for a public hearing, must be received by November 3, 2026. Treasury and the IRS may revise the proposal in response to comments and any hearing process before issuing final regulations. If finalized, the regulations may also be subject to legal challenge, although the scope, timing, and outcome of any such challenge cannot be predicted.

Practical Considerations

Private colleges and universities may wish to begin identifying policies and programs that could be implicated by the proposed regulations. A preliminary assessment may be especially appropriate for practices involving express race-based requirements or preferences. Institutions should consider involving legal counsel at the outset so that legal advice, factual assessment, and implementation planning can be structured appropriately and privilege protections can be preserved to the extent applicable.

Private institutions should also consider the practical distinction between institution-administered programs and programs administered by independent third parties, although the NPRM’s reference to school-supported programs suggests that institutional funding, sponsorship, endorsement, or involvement could remain relevant. Similarly, restricted gifts and donor-funded scholarships may require individualized analysis based on the applicable gift terms, institutional role, and governing law.

Donor-restricted scholarships may require particularly careful analysis. The NPRM contemplates that, where a donor’s gift instrument or letter of intent expressly makes race, ethnicity, or national origin an eligibility criterion, an institution may need to work with the donor or, where appropriate, the donor’s heirs or representatives to identify alternative eligibility criteria. Any such review should account for the governing gift instrument, state law governing charitable gifts and modification of restrictions, the institution’s authority under applicable documents, and the timing and status of scholarship awards. The proposed rules’ lack of any grandfathering provisions with respect to multi-year financial awards or donor-restricted charitable gifts may be of extra concern.

The NPRM and related Treasury materials suggest that private institutions may be able to pursue educational-access objectives through criteria that do not turn on race, color, or national or ethnic origin, such as financial need, geography, first-generation status, individual hardship, military-family status, or academic achievement. Institutions should proceed carefully, however. These examples do not appear in the proposed regulatory text itself, and the legal analysis of any alternative criterion will remain fact-specific, particularly where an alternative is selected or administered as a proxy for a prohibited classification.

Although the NPRM does not itself revoke any private college or university’s tax-exempt status, a final rule could create substantial consequences if the IRS were ultimately to determine that an institution does not satisfy the nondiscrimination requirement. Depending on the circumstances, loss of Section 501(c)(3) status could result in federal income-tax exposure, affect the deductibility of future charitable contributions, and raise questions under tax-exempt bond documents, grant agreements, financing arrangements, and institutional disclosure obligations. Those consequences would ordinarily follow an IRS examination and determination process, with applicable administrative and judicial review rights, rather than arising automatically upon the regulations’ effective date.

Because the proposed regulations address tax-exempt status and intersect with other federal and state legal requirements and legal precedent, an institution’s review efforts should involve appropriate internal stakeholders and should be coordinated closely with legal counsel.

Note, while these practical considerations and the next steps outlined below are focused on private colleges and universities, as they are directly implicated by the proposed rules, public colleges and universities and public university foundations should also consider conducting similar reviews to better understand their risks in the current environment.

Next Steps

Private colleges and universities should consider:

• Reviewing the NPRM and identifying institutional policies, practices, and programs that expressly use race, color, or national or ethnic origin as an eligibility criterion, preference, or selection factor.

• Evaluating admissions, financial aid, scholarship, athletic, student affairs, and institution-supported programs in light of the proposed regulatory language.

• Reviewing restricted gifts and donor-restricted funds and related agreements to identify scholarships or programs that may warrant further analysis, including establishing a process for assessing donor-restricted scholarships and funds that incorporate race, color, national origin, or ethnicity in their eligibility criteria in consideration of applicable gift terms and state-law restrictions.

• Evaluating potential tax, financing, grant, and disclosure implications associated with the potential impact of the proposed rules on the institution’s Section 501(c)(3) status, including any implications for tax-exempt bond financings, pending transactions, continuing-disclosure obligations, and grant agreements.

• Coordinating among legal, advancement, financial aid, admissions, student affairs, athletics, finance, compliance, and other relevant offices to develop a consistent institutional inventory and review process. Institutions may wish to involve outside counsel, as appropriate, to assist with legal analysis, project management, and consideration of relevant institutional practices.

• Considering whether to submit comments on the NPRM, independently or through higher education associations or other coalitions.

• Monitoring requests for public hearings, any Treasury or IRS responses to public comments, and any litigation challenging the proposed rules.

• Consulting legal counsel before making material changes to institutional policies or programs.

Conclusion

The proposed regulations would represent a significant expansion of the IRS’s stated nondiscrimination expectations for private educational institutions seeking to maintain Section 501(c)(3) status. Although the proposal is not final and important questions remain regarding its scope, implementation, and enforceability, private colleges and universities may benefit from a measured, cross-functional review of potentially affected practices during the rulemaking process and before the proposed applicability date.

Hunton’s Higher Education Team regularly advises colleges and universities on compliance with federal and state education laws, including non-discrimination laws and 501(c)(3) status. If you have questions regarding this development or its implications for your institution, please contact your regular Hunton Higher Education attorney.