A proposed rule from the Trump administration, aimed at limiting diversity initiatives, could have significant effects on private schools and universities by potentially revoking their tax-exempt status. The rule, announced by the Treasury Department and the Internal Revenue Service (IRS) on September 3, 2026, would strip nonprofit schools of their tax-exempt status if they use race as a factor in any program designed to assist students. This includes everything from admissions and scholarships to athletic and academic programs. The rule could take effect by mid-2027, after a two-month comment period, unless it is blocked by legal challenges, which are expected. Under the proposed rule, private schools—ranging from K-12 institutions to universities and professional schools—would lose their tax-exempt status if they engage in any program that "discriminates on the basis of race, color, or national or ethnic origin." While the rule does not define the term "discriminate," Treasury Secretary Scott Bessent has stated that any program with diversity goals would be considered discriminatory. This would apply to all academic and athletic programs, as well as all scholarships and admissions policies aimed at increasing diversity. However, the rule would not affect religious schools that prioritize admitting students who share their faith, nor would it apply to public universities. However, it could still affect the foundations that provide scholarships to public university students. The IRS estimates that this rule could impact around 18,000 private schools that are attended by 750,000 students. These schools rely heavily on their tax-exempt status to reduce their tax burdens and attract donations. Without these benefits, tuition costs could rise sharply, and the financial strain on many institutions could increase. In 2025, Americans gave about $92 billion in charitable donations to private schools, which typically cover about 10% of their budgets. A shift in policy could complicate donor relationships, alter scholarship distribution, and lead to costly legal battles, as the government itself has acknowledged. The proposed rule is based on the Trump administration's interpretation of racial discrimination, which views any racial preference as discriminatory, even when intended to correct historical injustices. The IRS cited past legal precedents, including the Supreme Court's 1983 decision in Bob Jones University v. United States, which revoked the tax-exempt status of a university that banned interracial relationships. Another key case, Students for Fair Admissions v. Harvard in 2023, ruled that public funding cannot be used by schools that consider race in admissions. However, legal experts argue that the proposed rule extends these rulings beyond their original scope, applying to all private schools regardless of whether they receive federal funding. They also suggest that the Trump administration's interpretation of these cases is flawed, as the Harvard case only applied to publicly funded institutions and allowed for some exceptions. Legal scholars and educational organizations have raised concerns that the rule may be unconstitutional and could lead to extensive legal challenges.