here is the decision:
http://www.ksbe.edu/pdf/doe_decision_20061205.pdf
it appears that courts have ruled that "tuition" is a contract between two entities (student, school) and that racial discrimination is prohibited in contracts. hence, private schools that charge tuition, cannot have racial preference. part of the dissent is based on this; that if the school were tuition free, it would be fine. this is a weak argument in my opinion - that tuition implies a contract exists.
Nah, I think that's right. It does imply a contract.
I think the key here though is that they are not suing for a violation of Constitutional rights, so state action is irrelevant. They are suing for a violation of the Civil Rights Act of 1866. Even if they win, Congress can change that. I wonder if Congress would, though.
There is also the question of whether a Congressional enactment can regulate purely intrastate commerce. I'm not sure that anyone has raised that, though.
Correction: The statute was enacted under the 13th Amendment, so interstate commerce is irrelevant. To me it's a question of statutory interpretation. Does the statute prohibit this, or does it not?
And if it does, then Congress can still change the statute to make an exception.