The new Federal Scholarship Tax Credit, or FSTC, will take effect in January 2027. The program, written into law by Congress in 2025, has been described as the nation’s largest school choice program. It’s also created lots of confusion about what it involves and how it will work. This week, the U.S. Treasury finally issued two sets of rules—one set of rules will govern the program in 2027, and a longer set of proposed rules will be the subject of a public hearing in December (wonky as hell, I know). With so much still in flux, I reached out to Jim Blew to learn where things stand and how the 2027 rules will shape the program when it goes live. Jim advises the Federal Scholarship Tax Credit Coalition and was immersed in this effort when he served as assistant secretary for policy at the U.S. Department of Education under Secretary Betsy DeVos. Here’s what he had to say.
—Rick

Rick: Jim, we’re approaching the January start date for the Federal Scholarship Tax Credit. For readers who haven’t followed this closely, what’s the deal?

Jim: This law has the potential to generate billions of dollars for K-12 scholarships for students in public, charter, and private schools. It allows individual taxpayers to claim a dollar-for-dollar credit of up to $1,700 annually for donating to a “scholarship-granting organization,” or SGO. That money can then be bundled into scholarships for a variety of educational expenses—including tutoring, school-provided after-school programs, and private school tuition.

Rick: Why do you think this program is important?

Jim: Because I think it will improve outcomes for students. Nationally, roughly a third of 4th and 8th graders are not learning to read or do math at the “basic” level. These scholarships will help children get the extra services or new school they need to thrive. Reformers like me call this giving families “education freedom.” For many families, especially in states without school choice programs, it will be the first time they have some power over their children’s education.

Rick: This week, the U.S. Treasury issued its eagerly awaited rules on how the program will work. What are the key takeaways?

Jim: There are three main takeaways. First, the rules lay out how governors—or whoever state law designates—opt in to the program and let students in their states access these scholarships. Thirty states have opted in already for next year, and the rest have until January 1, 2027. States have to opt in each year. If a state doesn’t opt in, its students can’t access these funds during that calendar year, though residents can still donate to SGOs in other states and claim the credit. Second, the rules dictate how governors need to compile the list of organizations that will be authorized to provide FSTC-funded scholarships in their state—and bar states from adding their own restrictions. Finally, they explain how taxpayers can get the credit for donating to the organizations, with Treasury proposing to allow each spouse in a marriage to claim the $1,700 credit when couples file jointly, for a total credit of up to $3,400.

Rick: What exactly is an SGO?

Jim: SGOs are tax-exempt, nonprofit organizations that serve as the intermediary between donors and scholarship recipients. They design their own K-12 scholarship program, raise money from tax-credited donations, process scholarship applications, vet the recipients for eligibility, and, of course, distribute the scholarships. They must also comply with federal laws, IRS oversight, and state review. SGOs will determine which education services to offer and the specific amount of aid to provide based on need. But they have to play by a long list of federal rules to qualify and be on a state’s approved list to operate in that state.

Rick: What are the key federal rules governing these organizations?

Jim: An SGO must be a 501(c)(3) public charity, spend at least 90% of its income on scholarships, and serve at least 10 students who don’t all attend the same school. Those students have to be in the organization’s state and come from households at or below 300% of their area’s median income, adjusted for family size. The Treasury Department and the IRS estimate that 96% of children in states that have opted in will qualify, based on this income cutoff. SGOs also must give priority to returning recipients and their siblings, and they can’t let donors earmark contributions for specific students.

Rick: How many SGOs do you expect to see?

Jim: Initially, I thought there would be thousands, because lots of small sets of schools or extended-day programs were thinking about creating SGOs. But over time, many of those groups have opted to instead partner with a more established organization that cares about their type of program or students. So, at this point, I’d say hundreds, with a few large ones in each state and 30 or so organizations that operate in multiple states.

Rick: How will potential donors be able to evaluate these groups?

Jim: At first, we’re going to rely on SGOs to market themselves and on taxpayers to find them through local networks. The IRS will publish a list of approved organizations, but that’s just a start. Over time, we’ll need a taxpayer-focused portal that lists all authorized SGOs with key information for potential donors. We also need a family-focused portal where parents can identify schools and programs that fit their needs and the organizations that provide scholarships to them.

Rick: Alert readers might have heard something about proposed rules and final rules. In fact, the rules you just mentioned don’t seem to cover the whole landscape. Can you explain what the deal is with these 2027 rules vs. the proposed rules?

Jim: The 2027 rules are “temporary” in that they will govern the tax credit scholarship program in its first year. They don’t fully address a couple of issues, including allowable uses of funds, and so a more thorough set of rules is needed. That brings us to the proposed rules that Treasury also released this week. I call them the “2028 and Beyond Rules” because they will govern the program beginning in 2028 and become permanent. The proposed rules cover more topics and will go through the typical rulemaking process, including a 60-day public comment period.

Rick: We saw a version of a tax credit scholarship floated during Trump’s first term, when you worked at the U.S. Department of Education. How is this program different from that first iteration?

Jim: You’re right that the 2025 law differs from what was originally proposed. Some of the changes were quite positive—like the $1,700 cap on each taxpayer’s credit. That will force SGOs to broaden their base of financial support by collecting many small individual donations. The most problematic part is that, unlike the version the House passed, the final law gives governors the power to block families’ access to K-12 scholarships in their states by not opting in.

Rick: Republicans have emphasized the value of returning education to the states. Given that, what’s the problem with requiring governors to opt in?

Jim: Governors are political animals. By giving them veto power over whether a state can participate in the FSTC, the law Congress passed instantly made this program into a partisan political issue. In Kentucky, legislators had to override the governor’s veto to opt in. For those of us who believe that parents are primarily responsible for the education of their children, there was no reason for Congress to insert governors into the private interaction between donors who want to help students and families who want the help.

Rick: You note that scholarship funds can go to both private and public options. What does that mean in practice?

Jim: An SGO might raise tax-credited donations from its community to fund, for example, tutoring scholarships for public school students. It will then take in and vet applications from families who want tutoring for their children while it puts together a list of qualified tutors to serve those students. Finally, it will award the scholarships to cover tutoring costs. Families who are selected can pick a tutor from the list and use the funds they are awarded to cover the cost. Most SGOs will probably rely on digital wallets. In practice, that means the family directs payment through the wallet, and the money goes from the SGO’s account to the tutor. That helps prevents the money from being spent fraudulently.

Rick: How much money do you expect the credit to generate next year?

Jim: I’m tempted to dodge your question by just saying it could be much more than the $500 million initially projected by Congress’ Joint Committee on Taxation for fiscal 2027. But let me go on the record to predict SGOs will collectively raise about $3 billion. To hit that number, less than 2% of federal income taxpayers will need to contribute.

Rick: Will that many donors really be motivated to give or even know how to go about giving?

Jim: You’re right to recognize the challenge. I hear people predicting that 20% or 30% of taxpayers will do this, “because it costs them nothing.” It’s really not that simple. About 40% of households owe no federal income tax, and the credit only helps those who do. So those households can’t benefit from the credit. Moreover, people first need to understand the credit is even available. Then, they need to find an SGO that matches their interests. Finally, they have to actually make a donation, designate it for the credit, and claim it on their tax return. A lot of smart people in government and in the private and nonprofit sectors are working to streamline every step of that process.

Rick: How do you anticipate taxpayers will navigate all this?

Jim: We hope employers will make it easy to give through payroll deductions. That would greatly simplify the process for taxpayers. Thankfully, Treasury’s new rules confirm that after-tax payroll deductions will be allowed. It also helps to understand what “dollar-for-dollar” means. Say you owe $5,000 in federal income taxes. You give $1,700 to an SGO. When you file your taxes, you subtract that $1,700. Now, you owe $3,300 to the IRS. You still pay $5,000 in total: $1,700 to the SGO and $3,300 to the IRS. You just get to decide where part of your taxes goes: Rather than giving the IRS the full $5,000, you’re redirecting a portion of it to a cause that you care about.

Rick: What do you say to those worried about self-dealing, fraud, or discriminatory conduct?

Jim: Let’s be clear: Advocates for this tax credit are broadly supportive of efforts by the Treasury and IRS to weed out fraud and discrimination. It hurts kids and creates a PR disaster. The IRS already has numerous mechanisms in place to prevent fraud by charities like SGOs. And both the law Congress passed and Treasury’s new rules create additional safeguards: States must certify SGOs every year, the organizations must keep credit-eligible gifts in separate accounts and report every donor to the IRS so it can check claims against tax returns, and insiders and major donors can’t receive scholarships for their own families. Plus, the whole operation relies on raising voluntary contributions from taxpayers. That creates an incentive for the organizations to protect their reputations by weeding out fraud.

Rick: If we’re sitting here a year from now, what does success look like?

Jim: First, that at least 1 million students and their families are benefiting from an FSTC-funded scholarship. Second, that there’s early evidence of meaningful academic improvements for scholarship recipients. Researchers will need to study that, and the full effects will only become clear with time, but I hope to see promising signs. And third, that policymakers appreciate the power of increasing education freedom for families and teachers.

This conversation has been edited for length and clarity.