The new guidance comes as the Justice Department and North Carolina battle in federal court over a state law passed in March that prohibits people from using public restrooms not corresponding to their biological sex.
Officials from the Education and Justice departments told schools that while the new guidance does not carry legal weight, they are obligated not to discriminate against students, including based on their gender identity.
"Our guidance sends a clear message to transgender students across the country: here in America, you are safe, you are protected and you belong – just as you are," Vanita Gupta, head of the Justice Department’s Civil Rights Division, said in a statement accompanying the letter sent to school districts nationwide.
The guidance contains an implicit threat that those not abiding by the Obama administration's interpretation of the law could face lawsuits or a loss of federal aid.
As a condition of receiving federal funds, the letter said, a school agrees that it will not treat any person in its educational programs or activities differently on the basis of sex.
It added that the administration's interpretation of existing regulations means that a school cannot treat a transgender student differently from other students of the same gender identity.
The issue of access to bathrooms by transgender people flared into a national controversy after North Carolina passed a law in March that made it the first state in the country to ban people from using multiple occupancy restrooms or changing rooms in public buildings and schools that do not match the sex on their birth certificate.
The U.S. Justice Department this week asked a federal district court in North Carolina to declare that the state is violating the 1964 Civil Rights Act and order it to stop enforcing the ban.
North Carolina's Republican governor, Pat McCrory, and the state's secretary of public safety sued the agency in a different federal court in North Carolina, accusing it of "baseless and blatant overreach."