Dive Brief:

• The Trump administration’s recent proposal to revoke the tax-exempt status of private nonprofit colleges over their diversity efforts could bring steep financial consequences for institutions, according to a report out this week from Moody’s Ratings.
• Analysts with the ratings agency said widespread loss of tax status was “unlikely,” on the assumption that most institutions would probably try to comply with the proposed rules. However, even compliance could raise their legal costs and other expenses.
• If colleges did lose status, the main revenue hit would be on fundraising as donors would no longer be able to make tax-exempt gifts, the analysts said. Additionally, losing the ability to issue tax-exempt bonds would be “substantially negative” for institutions, they added.

Dive Insight:

While the Moody’s team did not make detailed speculative estimates about the IRS plan's costs to colleges, it is clear the change would be financially bad for the higher education sector. 

Chief among those costs would be the potential loss of philanthropic dollars. Among Moody’s portfolio of rated institutions, gifts represented 6.6% of gift revenue in fiscal 2025 — a significant potential loss should donors move their giving to tax-exempt organizations to preserve their own write-offs.

“Philanthropic gifts are also a vital source of capital funding for new academic, residential and athletic facilities across higher education, and a decrease in large gifts for capital projects could further stress the balance sheets and debt capacity of institutions operating in a difficult environment,” analysts said. 

Meanwhile, the added costs for institutions that lost their status of having to rely on taxable bonds would also likely be heavy. “An entity could ultimately have to absorb millions in additional debt service costs over the long term given the higher cost of capital of taxable debt,” the analysts said. 

As for the federal tax bills colleges might face, they would likely vary dramatically among institutions. Moody’s described the overall magnitude of those bills as “somewhat uncertain.”

The analysts also predicted a legal challenge to a final rule. The report pointed to successful lawsuits against Trump administration policies such as its multiagency efforts to cap indirect research funding and the Education Department's anti-DEI guidance.

The U.S. Department of Treasury proposed its rule earlier this month. If adopted as written, it would revoke a roughly 50-year-old IRS policy allowing colleges to favor racial minority groups in programming and financial assistance if that supports the college’s racial nondiscriminatory policy for students. 

“Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status,” Frank Bisignano, head of the IRS, said in announcing the proposal.

The Treasury is taking public comments on the proposal into early November before issuing a final rule, which the agency expects to go into effect in June. 

Fearing the regulations could become a new tool for the administration to target politically disfavored colleges, two House Democrats on Thursday introduced a bill that would create additional due process procedures for the IRS to investigate colleges. 

The legislation — which covers public colleges, private nonprofits, and their affiliated foundations and endowments — would require the IRS to document evidence against a college before launching an investigation. It would also bar the agency from opening a probe based on a college's curriculum or ideological positions, among other safeguards.