The clock is ticking: The ambitious new federal school choice program will launch in January. And while the broad aim of the program is clear—to direct federally bankrolled money to families to spend on schooling—key details are still being hammered out.
That’s why school and district leaders, school choice advocates and skeptics, and the broad field of education experts are waiting eagerly for proposed regulations—expected at the end of this month from the U.S. Department of Treasury—to answer pressing questions about how the tax-credit scholarship program will work and who will benefit.
“Everybody’s kind of watching and waiting on this September announcement to figure out, ‘how do I respond?’” said Mike Taylor, executive director of the National Association of Education Foundations, which is helping local nonprofits affiliated with school districts prepare to serve as organizations that give out student scholarship awards. “Nobody wants to invest time in something and figure out it wasn’t worth it.”
The tax-credit scholarship program, also called the Federal Scholarship Tax Credit or the Education Freedom Tax Credit, was signed into law last year by President Donald Trump as part of the broader tax and spending package known as the One Big Beautiful Bill Act.
Similar to programs that already exist in several states, the federal one encourages individuals to donate money to organizations that grant scholarships to school-age students by giving them a dollar-for-dollar federal tax credit on donations up to $1,700.
Under the law, students can use their taxpayer-funded scholarship money on a variety of approved education expenses, such as private school tuition, tutoring, or home-school costs.
The program could generate billions of dollars in new federal spending on education, including for public school students. One recent estimate from the American Federation for Children, a school choice advocacy group, showed that if 1 of every 5 eligible donors donate the full amount for which they can claim a tax credit, the program could raise as much as $37.6 billion—about the size of the National School Lunch Program and Title I, federal school aid for disadvantaged students, combined.
But students can only receive scholarships funded by the program in states where the governor has opted in. Many Democratic governors have not, although donors in states that don’t participate can still receive the tax credit if they give money to scholarship-granting organizations in participating states.
Several Democratic governors have signaled that they want to see the proposed regulations from the U.S. Treasury Department before deciding whether to join.
In advance of the regulations’ release, Education Week reached out to advocates and experts who have been closely following the program’s development to learn what questions—financial, logistical, and philosophical—they hope Treasury’s proposed rules will answer. Click on the links below to jump to a specific question.
- Will public schools truly benefit?
- Which students can participate?
- How much money will flow through the program?
- How much flexibility will states have?
Will public schools truly benefit?
Private school choice advocates cheered the passage of a new federal program that mirrors state-level initiatives aiming to boost private educational options. But unlike some of those state programs, the federal version also allows public schools to benefit.
Public schools that want their students to benefit from the scholarship dollars would have to partner with a new or existing nonprofit organization that gets certified to offer scholarships through the program. Then the public schools would charge fees for a service—such as tutoring, technology, or after-school programs—and encourage students receiving scholarships to cover those fees with scholarship dollars.
Some public school advocates fear the IRS regulations will be structured to smooth the path for non-public schools while putting up additional roadblocks that make it harder for public schools to participate.
Other barriers to public school participation are structural. Roughly 4,000 of the nation’s school districts have relationships with existing local foundations that give, or could give, scholarship funds to K-12 students, according to the National Association of Education Foundations. That leaves another 9,000 that currently don’t have a natural partner for participating in the federal tax credit program.
Taylor, the association’s executive director, sees the program as an opportunity for public schools to maintain programs and services they might otherwise feel budgetary pressure to cut: arts and music, after-school tutoring, credit recovery. His organization is encouraging members to expedite partnering with their school districts to take advantage of the new federal program.
“From our standpoint, we want to see every public school student benefit in some way,” Taylor said.
Taylor has been fielding a flurry of calls in recent weeks from school district superintendents trying to understand the program. He sees the tax credits’ emergence as an opportunity for local foundations to expand their footprint in schools and contribute even more to student success.
Schools that aren’t accustomed to charging fees for services could also be daunted by the logistical lift required for their students to participate.
“You have to encourage all of them to apply for the scholarship, you have to get certified for the scholarship with the SGO in some way. The SGO would have to know that they have enough money to fund all of those students,” said Kristin Blagg, a principal research associate focused on education at the Urban Institute, a left-leaning think tank. “It’s a little bit of a chicken and egg in terms of how you set up a program.”
Which students can participate?
The law states that students can participate in the program if they are eligible to attend a public elementary or secondary school and if their family’s household income does not exceed 300% of the area gross medium income.
An analysis by the American Federation for Children found that potentially 92% of all K-12 students will be eligible to participate by those measures (before accounting for states that don’t participate in the program). Students must use their scholarship funds at a school, defined as either a public, private, or religious school providing K-12 elementary or secondary education as determined by state laws.
The IRS regulations may clarify whether and how schools and other education providers will be required to verify students’ eligibility. Automatically certifying students who participate in free and reduced-price meal programs could be a big help for schools that may otherwise struggle to manage the paperwork load of eligibility checks, Blagg said.
While all K-12 age students meeting those income requirements are eligible to receive a scholarship, they may not be able to use it depending on their specific schooling arrangement—particularly if they’re home-schooled, or attend microschools or other alternatives that could fall under the home-school umbrella. How states define these less common types of schooling options may determine whether families can use funding from the tax-credit program.
In previewing the regulations in June, the Treasury Department said, basically, that home-school families could get scholarship money if their state treats home schools as schools under state law.
Twenty-two states categorize home-schooling families as either private or religious schools.
This interpretation will leave many students out, said Leslie Hiner a senior adviser on legal policy for EdChoice, a school choice advocacy organization.
“What that really means is kids who are otherwise eligible for the scholarship wouldn’t be able to use the money,” she said. “This must be reconciled. It was never the intent of Congress to cut out any kids from participating in this.”
There’s also some ambiguity about whether students attending pre-K can receive scholarships. Students are eligible to participate if they’re eligible to enroll in public elementary or secondary schools—which would suggest that, in states and districts where pre-K programs are housed in elementary schools, pre-K students could receive scholarships. The regulations may provide further clarity, however.
Advocates across the political spectrum also hope the IRS regulations will point the way toward making the program’s mechanics more digestible for the general public.
“Find the random person off the street and ask them to describe the difference between a tax deduction and a tax credit,” Blagg said. She hopes the regulations make the specifics of the tax credit benefit understandable even for those who aren’t steeped in the nuances of tax policy.
How much money will flow through the program?
The law’s language appears to cap the total tax credit amount at $1,700 per tax return. That means married couples who file jointly would be limited to $1,700 for the pair, versus $3,400.
School choice advocates say this policy penalizes married people who wish to donate, and will limit how much money flows into scholarships. The American Federation for Children estimates that allowing married couples who file jointly to donate $3,400 could mean, at a maximum (if everyone eligible claims a credit), as much as $75.1 billion more for the program.
Another issue is how much scholarship-granting organizations, which are state-certified nonprofits, must dedicate to student scholarships and how much they can set aside for administrative expenses. The law requires that SGOs direct 90% of their income toward student scholarships, which leaves 10% for administrative expenses.
The concern, at least for many supporters of the law, is that smaller and newer organizations won’t have enough money left for the business side of running a nonprofit, such as marketing and building platforms to distribute funds for approved expenses, said John Schilling, a longtime school choice advocate who has lobbied for the program and serves on the steering committee for the Federal Scholarship Tax-Credit Coalition, which has been promoting the program.
“Let’s say you’re a new SGO and you go out and you raise a million dollars in $1,700 increments, and you can only use $100,000 to ramp up and promote it, that’s an unworkable business model,” he said. “We want to make sure that they can use other tax-exempt income to do this.”
A preview of the regulations released this summer said that 90% rule wouldn’t apply in the same way to organizations that focus “largely”—but not exclusively—on scholarship-granting activities. Basically, for those nonprofits, 90% of income raised specifically for scholarships through the federal tax-credit program, and put in segregated accounts, must go to scholarships. But that rule wouldn’t necessarily apply to additional money the groups raise through other means.
However, that still leaves a lot of uncertainty, such as what portion of an SGO’s activities must be devoted to scholarship-granting activities to qualify for an exception from the rules governing how much income must go to scholarships, Hiner said.
“The obvious question was, well, what does ‘largely’ mean?” she said.
How much flexibility will states have?
State lawmakers in Vermont passed a law this summer that requires SGOs participating in the federal program to give scholarships only to students attending schools that receive public dollars.
The IRS regulations could render that state restriction unworkable, as advocates continue to press for details on how much latitude states will have in administering the program.
Observers invested in rigorous, evidence-based instructional strategies have urged the IRS to prioritize quality control and fraud prevention as they draft the regulations. Otherwise, they argue, a large number of students could end up spending scholarship funds on educational programming of questionable quality that doesn’t meet their needs.
Narric Rome, managing director of government relations for Accelerate, a nonprofit advocate for high-quality tutoring, fears the IRS may give scholarship-granting organizations too much discretion over how they award dollars to students—and states too little authority to ensure scholarship-funded programming is above-board.
Accelerate has partnered with states in recent years to develop best practices for high-impact tutoring, including requirements for the number and frequency of tutoring sessions available to students.
Several states have programs that meet Accelerate’s quality standards, but not all of them. Those disparities could be magnified as scholarship funds spread, Rome said.
“There is literally no quality control at the moment on what SGOs have to do,” Rome said.
The law says students who receive scholarships through the federal program must use them to cover expenses that are distinct from what they cover with state-level scholarship dollars.
But that language also leaves potential loopholes to be exploited, Blagg said.
“What if you’re a private school, and you say my tuition is $5K and my fees are $2K, can you fund them from multiple sources?” Blagg said. “That’s something that I think we will continue to look for whether there’s going to be guidance on that sort of thing.”
Similarly, the regulations could address whether states will have tools to prioritize scholarship-granting organizations they independently deem appropriate, or to reject prospective organizations that don’t align with policy priorities, like serving children from low-income families.
But, Rome said, early indications suggest the IRS isn’t planning to give states this much power.
“In most of the webinars I’ve attended, no one seems to think that there’s more room for governors to have a say in who the SGOs are or what the SGOs are doing,” he said.
That doesn’t mean states won’t find creative workarounds. Blagg hypothesizes that some states, if blocked by the federal rules from regulating schools that accept these scholarships, might instead revise their requirements for schools more broadly to subject them to regulation.
