All but one of the nation’s 26 Republican governors are signing their states up for the first federal program that will fund private school scholarships through tax credits.
Their Democratic counterparts, meanwhile, have been much more hesitant. A handful have already said no. Some who have shown interest have said they’d like public school students to benefit.
In opting in last week, Colorado Gov. Jared Polis touted the federal tax-credit scholarship program as a chance to raise funds for “everything from meaningful summer school to tutoring to after-school activities to scholarships to schools.”
And in North Carolina, Gov. Josh Stein said last August, “I see opportunities for the federal scholarship donation tax credit program to benefit North Carolina’s public school kids.”
Can a program that represents the federal government’s first big foray into bankrolling private school choice end up helping public school students?
The law allows it.
The unanswered question is, will a significant portion of funds the program generates end up paying for services public school students use?
Here’s a deeper look.
What is the federal tax-credit scholarship program?
The One Big, Beautiful Bill Act signed last July by President Donald Trump includes a provision granting taxpayers federal tax credits of up to $1,700 in exchange for donations to nonprofits that issue scholarships to cover K-12 school-related expenses.
The program takes effect next year, but only in states whose governors opt in. To participate, governors must submit to the IRS a list of “scholarship-granting organizations” operating in their states that meet the federal requirements.
Tax-credit scholarships are a familiar mechanism for funding private school choice, with 20 states using it for programs of their own, according to an Education Week analysis. Many are targeted to specific student populations such as low-income students or students with disabilities.
Instead of relying on direct financing via state or federal funds, tax-credit scholarship programs rely on donations to organizations that give out the money as scholarships students use toward private school tuition. Donors then claim a tax credit for their contributions.
The federal scholarship program offers contributors a more generous tax benefit than is available for most charitable giving. Here’s why: Taxpayers can receive a tax deduction for most charitable contributions, lowering how much income is taxed. But donors to scholarship-granting organizations will be able to claim dollar-for-dollar credits that directly reduce their tax bill by up to $1,700, just like a gift card reduces the amount you pay for online shopping.
Few restrictions for the federal program are written into the law. There’s no minimum or maximum scholarship size, and students can receive scholarships as long as their family’s income doesn’t exceed 300% of their area’s median income. There are no academic accountability or nondiscrimination requirements for schools accepting the scholarships.
Can the program pay for costs for public school students?
Yes. The law says the federally backed scholarships can cover a wide range of expenses tied to enrollment or attendance at any K-12 school, public or private—including religious schools.
Those expenses include tuition, school fees, tutoring, services for students with disabilities, books, supplies, internet access, and equipment including computers. Room and board, uniforms, transportation, and supplementary services that can include before- and after-school programs are also allowed.
A fact sheet on the new program issued last week by the federal Education and Treasury departments lists uniforms or equipment for career-and-technical education programs and after-school enrichment programs as examples of expenses scholarships could cover.
“It is clear as day,” said Jorge Elorza, a former mayor of Providence, R.I., and the CEO of Democrats for Education Reform, which has been urging Democratic governors to participate in the federal program. “It’s written into the statute that public school students can benefit.”
Will a significant portion of the funds generated end up paying for services used by public school students?
We don’t know yet. To start, it’s unknown how much money will be available for the federally bankrolled scholarships.
Congress put no budget cap on the program, but it’s still uncertain how many taxpayers will contribute to scholarship-granting organizations and how much they’ll give.
Congressional scorekeepers have estimated the federal government will issue $500 million in tax credits next year as the program gets off the ground. By 2034, they project $4.4 billion will come out of what taxpayers owe to the federal government and flow instead to scholarship-granting organizations. (By comparison, Title I grants to school districts now total about $18 billion annually.)
Early on, Elorza expects most money to flow to private schools, based on the trajectory of large state-funded private school choice programs. Beneficiaries in the early years of those efforts have been mostly students already attending private schools.
He expects that balance to change later on, with more public school students receiving tax-credit scholarships, either as they switch to private schools with the new financial assistance or seek out scholarships for tutoring or enrichment.
Private schools have a head start, particularly in states where an infrastructure to channel these kinds of donations is already in place, said Sasha Pudelski, the director of advocacy at AASA, The School Superintendents Association.
States with their own tax-credit scholarship programs already have scholarship-granting organizations that have been supporting private school students. And the federal law also prioritizes scholarships for students who received one in the past year and siblings of current scholarship recipients.
“I do not predict a substantial amount of money will be going to support students in public schools, particularly students in high-need public schools,” said Pudelski, who also co-chairs the National Coalition for Public Education, which recently issued a report calling the new federal program risky for public schools and students.
Another consideration, Pudelski said, is that a public school education is free by definition. Supplementary services—tutoring and after-school programs, or fees for extracurricular activities—cost less than full-time private school tuition, demanding smaller scholarships that account for a smaller portion of all scholarship funding.
But tax-credit scholarship proponents argue that the new program can spur the development of an infrastructure that allows public school students to benefit.
The barrier to entry to become a state-sanctioned scholarship-granting organization is intentionally low, said Leslie Hiner, vice president of legal policy at EdChoice, an advocacy organization supporting private school choice.
“This was certainly written to be as broad-based as possible, the point being that the educational needs of kids are very broad-based as well,” she said. “So this is designed to target those needs.”
Existing charities can become scholarship-granting organizations, she said. Among a few other requirements, the law says the organizations must be 501(c)(3) nonprofits, give out scholarships to at least 10 students who don’t all attend the same school, and award at least 90 percent of their income in scholarships.
Public school foundations that help districts raise money for special initiatives or college scholarships are strong candidates to become scholarship-granting organizations, Hiner said. Many already help students directly, she said, and could expand their direct support for students.
The IRS is developing regulations expected to flesh out more specifics on how these arrangements could work—including how organizations could collect donations for multiple types of scholarships.
It also remains to be seen whether public school districts emerge as service providers that collect scholarship money in exchange for services like tutoring, after-school programs, and extracurricular activities—as some districts in states with expansive private school choice programs have.
Even if a robust infrastructure emerges for public school students to participate in the scholarship program, there are no guardrails built in to ensure the money pays for high-quality services, said Thomas Toch, the director of FutureEd, a think tank at Georgetown University that has examined choice programs.
Program proponents have noted tutoring as a possible use of scholarship funds, but the most effective tutoring in recent years has been delivered in school and is closely tied to the curriculum rather than by out-of-school vendors, Toch said.
In the federal tax-credit scholarship program, “it’s up to the SGOs to determine which providers are sufficiently high-quality or not,” he said, “and you can imagine how hard that would be for an SGO to understand the quality of 50 different private tutoring providers.”
How much control will governors have to direct scholarship funds to public school students?
A number of Democratic governors say they’re awaiting IRS guidance before they decide whether to participate in the tax-credit scholarship program, in part to find out how much control states might have over how the program operates.
Could they set accountability and nondiscrimination requirements, for example, or ensure that a particular percentage of scholarship money goes to public school students?
It seems unlikely. Under the federal law, a governor’s role is to decide whether to participate and provide a list of all scholarship-granting organizations in the state that meet the minimum legal requirements. The IRS has indicated the regulations are unlikely to give states more discretion over which SGOs it includes.
“For governors, either an SGO is in compliance with the federal law or they’re not. If they are, they go on the list. If they’re not, they don’t,” said Hiner, from EdChoice. “That is the full breadth of the governor’s authority.”
However, scholarship-granting organizations will be able to determine their own areas of focus—particular services or particular communities, for example. Governors should encourage scholarship-granting organizations to form, influencing their state programs in that way rather than through regulation, Hiner said.
“What a governor can do is from a bully pulpit,” she said.
Elorza, of Democrats for Education Reform, urges governors to sign their states up now, so new scholarship-granting organizations can start taking root.
In telling Education Week last summer why New Mexico wouldn’t opt in, Democratic Gov. Michelle Lujan Grisham said through a spokesperson she was worried that tax-credit scholarships could exacerbate public school enrollment declines and hurt their budgets.
To Elorza, the federal program “is all additive” for states because the money comes out of federal taxes.
“It does not impact state education budgets one single cent,” he said. “It’s just a no-brainer that at the state level, they should opt in, give themselves the opportunity to recoup these funds.”
