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I think the university made the right choice. The students in this group have every right to associate with one another on any basis they choose; they just can't receive a subsidy for doing so if the group is not open to all students.
Most campus religious organizations do not find this type of rule to be any kind of hindrance. Hillel Jewish student organizations, for example, are open to all. It does not prevent them from achieving their goal of serving the Jewish community or providing a space for Jewish fellowship.
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