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What Does the New Federal Scholarship Tax Credit Program Mean for States?

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This blog is part of the series, Money Matters, exploring research on the role of school funding in advancing equitable opportunities and outcomes for all students and elevating evidence-based policy and practice solutions.

The U.S. Department of the Treasury (Treasury) has released regulations for the new Federal Scholarship Tax Credit (the FSTC Program) for donations to scholarship granting organizations (SGOs) created by the One Big Beautiful Bill Act. Together, the statute and regulations provide the clearest picture yet of how the program would operate beginning in 2027. The regulations were issued as an interim final rule (IFR) for 2027 and a proposed rule for future years. The IFR takes effect as issued; however, the Treasury could make changes to either rule in response to public comments submitted by December 1.

Several features of the FSTC Program stand out, including the role of states, the authority given to SGOs, and how the program differs from long-standing federal K–12 education programs. Three major themes emerge:

  1. States have very limited authority over program design and implementation.
  2. The program has limited transparency and accountability compared to major federal K–12 education programs.
  3. The program is not structured to directly send or require any minimum amount of resources to be sent to public schools or their most underserved students.

With the statute and regulations providing a fuller picture of the FSTC Program, we unpack the topline implications below.

What Is the FSTC Program?

Flow diagram illustrating the funding mechanism and flow for the federal scholarship tax credit program. On the left, an Individual gives up to $1,700 to a Scholarship Granting Organization or Organizations, also known as SGOs. Here an arrow points to the right to demonstrate an individual’s contribution to an SGO or SGOs. Separately, as a result of the individual contribution to an SGO or SGOs the US Treasury Dept./Internal Revenue Service provides a matching tax credit back to the Individual of up to $1,700, shown by an arrow pointing left. The SGOs then direct funds to K–12 students in families earning up to three times the area median income, shown by an arrow curving down and to the right. Those funds then flow downward to Qualified K–12 education expenses, which include tuition, fees, room and board, uniforms, tutoring, and other expenses. A separate box with a dashed border represents States, with a note that states opt in or out to the overall program, and that opt-in states do not receive or control the funds.Alt text generated by Claude Sonnet 4.6 and reviewed for accuracy by authors.

Administered by the Treasury and the Internal Revenue Service, the FSTC Program allows individuals with a tax obligation to claim a dollar-for-dollar tax credit of up to $1,700 for donations to SGOs. The tax credit becomes available in 2027.

Claiming this nonrefundable credit allows individuals with a tax obligation to direct donations to an SGO or SGOs of their choosing and, in return, have the Treasury pay them back each dollar sent up to $1,700. As a result, the Treasury collects less tax revenue.

The Congressional Joint Committee on Taxation (JCT), the nonpartisan official tax scorekeeper for Congress, estimates the FSTC Program will reduce federal revenue by $25.9 billion over 10 years. In 2027, the program's first year, JCT estimates that about $500 million of taxpayer funding will be available for SGOs. Over the first 8 years, an average of about $3.2 billion a year could be available to SGOs. A different estimate from the Treasury puts the figure at $26 billion annually by 2030. However, as a new and novel provision in the tax code, actual participation is uncertain, and federal revenue losses and SGO funding could be lower or higher.

Each year, in the 50 states and the District of Columbia, the governor or the entity responsible for federal tax decisions chooses whether to opt in or take no action (which results in nonparticipation). There is no penalty associated with either decision.

In participating states, SGOs directly receive taxpayer-subsidized donations and then decide how and to whom to allocate scholarships. Public schools and school districts cannot be direct recipients of the FSTC Program funds. All funds flow through SGOs and must be used for program-eligible K–12 education expenses. This includes tuition, fees, uniforms, room and board, books, technology, and transportation—which are all most commonly associated with attending private schools (two thirds of which are religious). Under the law, extended day programs, special needs services, and academic tutoring—services that public schools can provide and that some families pay to supplement—are also eligible expenses. While there is not yet guidance on this trio of eligible expenses, it is important to note that some of the "special needs services" a student with disabilities receives may already be services that their public school is legally required to provide as part of their Individualized Education Program.

States Have Limited Authority Over Program Design and Implementation

If a state opts in, its ability to make decisions about program design and implementation is limited.

  • States cannot place their own requirements on SGOs. Opt-in states are restricted to the limited federal parameters for SGOs: They must be a nonprofit organization and not a private foundation; use 90% of their income for scholarships for at least 10 eligible K–12 students, two of whom must go to different schools; refrain from earmarking funding for particular students and limit funding to eligible K–12 expenses; in most cases, prioritize previous year recipients and then their siblings; keep taxpayer-subsidized donations separate from other funds; and not engage in self-dealing. States are prohibited from adding their own requirements on SGOs as a condition for operating in the state. If a state opts into the FSTC Program, it must allow all eligible SGOs to operate, including those that provide scholarships or vouchers for private schools. For the more than 30 states without a universal or near-universal voucher program, participation would make federally subsidized private school scholarships available through participating SGOs, regardless of existing state education policies. This includes states where private school voucher programs have been rejected at the ballot box.
  • States cannot direct how scholarship funding is used. Similar to their lack of authority to choose SGOs, states cannot control or limit what SGOs award scholarships for. States cannot adapt or pick from educational expenses permitted under the FSTC Program or limit SGOs to certain allowed expenses. For example, a state cannot limit SGOs to only award scholarships for expenses associated with private schools or only those connected to public school students.
  • States cannot influence scholarship size or allocation. The law and regulations do not set an exact scholarship amount, range, or cap, and SGOs have sole authority to make these decisions. Additionally, states cannot require SGOs to target scholarships to low-income families. Under the FSTC Program, the income limit is set at 3 times the area median gross income (AMGI), which, for example, is $500,000 annually or more for a family of four in some parts of the country. An independent analysis found that 90% of families fit under the 300% AMGI ceiling; the Treasury estimates about 96% of families would. In states such as Arizona, Indiana, Iowa, and West Virginia—which have universal or near-universal private school voucher programs with no or high income limits that lack required targeting mechanisms—the beneficiaries of these programs are disproportionately wealthier families. Given its structure, this new federal program could yield similar outcomes.

The Program Has Limited Transparency and Accountability Requirements

The FSTC Program assigns SGOs the sole responsibility for scholarship distribution. The program also restricts states from setting any school enrollment, academic, and other accountability requirements for SGOs that are not included in the law. Private schools, as well as any other recipient receiving program funds, are not required to report total and scholarship-funded student enrollment nor their tuition, fees, or other charges. Without this information, policymakers and the public may have limited visibility into which students receive scholarships and where, specifically, funds were used.

Under the FSTC Program, recipients of these federally subsidized education funds, such as private schools, are not subject to many of the same requirements that accompany other federal education funding provided to states. For example:

  • Many long-standing federal education protections will not apply. Many of the fiscal and academic provisions and protections for students, including historically underserved students, that come with federal Elementary and Secondary Education Act (ESEA) and Individuals with Disabilities Education Act (IDEA) funds will not apply to taxpayer-subsidized funds allocated by SGO and used by students in private and religious school settings. Other federal protections are also in question and may depend on whether private entities receive federal funding from other sources or on the specific circumstance.
  • Academic reporting and accountability requirements are not required of private schools receiving program funds. Unlike public schools that receive federal ESEA funding, there is no requirement for private schools getting the FSTC Program funds to have their students take the same statewide tests in math and reading every year in grades 3–8 and once in high school. These tests provide results that are comparable across the state and hold schools accountable for improvement. Reporting on whether high school students earn a diploma and how long it took—accountability requirements for public schools under ESEA—is not required either. All of this means that it may be difficult to compare academic outcomes across students and schools participating in different sectors.

Program Design Limits Equitable Funding for Public School Students

The statute allows funds to be used for after-school programs, tutoring, and special needs services that could benefit public school students or could be directed to support private school students. Whether public school students receive substantial support, however, will depend on several factors, including donor preferences, the SGO landscape, SGO priorities, and SGO scholarship allocation decisions.

  • The program does not allocate funding based on student need, such as poverty, and restricts states from requiring SGOs to do so. Unlike long-standing federal education civil rights and funding laws, such as ESEA and IDEA, the FSTC Program does not distribute funding based on student characteristics such as poverty, nor across states based on their population of school-age children. As a result, this program may cause inequities in the amount of funding available across states, school districts, schools, and groups of students, including students from low-income backgrounds.
  • The program may favor SGOs with existing resources and infrastructure. Organizations with established fundraising capacity, operational expertise, and brand recognition may be better positioned to attract donations than newer or smaller SGOs. For example, a national organization that supports public funding helping to pay for private school expenses announced the formation of a national SGO and a multimillion-dollar advertising campaign. Existing SGOs operating in states with universal voucher programs may also have an advantage because of the infrastructure in place.
  • Structural barriers may make it more difficult for underserved communities to attract funding. Establishing and operating an SGO, building awareness, and soliciting donations all require ongoing investments. For locally based organizations seeking to support public school students in areas of concentrated poverty, these costs may create a fiscal barrier to participation, with no guarantee that the funding secured will exceed the resources spent pursuing it.

An Uncharted and Opaque Path Ahead

While the regulations provide additional clarity about the FSTC Program, whether and to what extent the Treasury will make changes following the public comment period remains unknown. Additionally, forthcoming guidance on eligible expenses could further clarify how program funds may be used and could provide additional constraints.

What is clear is that this new Treasury program represents a wholly different federal approach to supporting K–12 where:

  • States have limited authority over program design and implementation.
  • There are limited transparency and accountability requirements.
  • Federal resources are not directed specifically to public schools and their most underserved students, and simultaneously there is new federal funding for private school expenses.

Still, major questions remain about how the FSTC Program will operate. How much taxpayer-subsidized funding will flow to SGOs, and to what types of SGOs? Which students (public, private, homeschool) and from what socioeconomic backgrounds will receive scholarships—in what amounts—and for what type of educational expenses? To what extent will students from low-income backgrounds, students with disabilities, students experiencing homelessness, and other student populations specifically supported by federal education programs apply for and receive scholarships? And will the FSTC Program contribute to shifts in student enrollment that affect public school budgets?

However, with limited reporting and accountability requirements, the public will likely lack the data needed to answer many of these questions and fully understand who benefits from the FSTC Program and how federal resources are being used. For states, the central challenges include that they will have limited authority over how the FSTC Program operates and limited data to assess its effects on students, schools, and state education systems.