Beginning Jan. 1, 2027, the Federal Scholarship Tax Credit (FSTC) may create new opportunities to expand scholarship funding for elementary and secondary students. Enacted under the One Big Beautiful Bill Act and codified in Internal Revenue Code Section 25F, the credit is designed to encourage individual taxpayers to make qualified cash contributions to approved Scholarship Granting Organizations (SGOs).
Under the program, eligible taxpayers may claim a federal tax credit of up to $1,700 for qualified cash contributions made to approved SGOs. The credit becomes available only when a state or the District of Columbia elects to participate and submits its list of approved SGOs to the IRS.
For elementary and secondary schools, administrators, and families, the FSTC represents a potential new scholarship funding source that could help increase access to educational opportunities for qualifying students.
Understanding the Federal Scholarship Tax Credit
The FSTC creates a framework that encourages private donations to support scholarships. Rather than providing scholarships directly, the federal government offers a tax incentive for individual donors who contribute to approved SGOs.
A qualified contribution must be made in cash or equivalent to an approved SGO. The SGO then uses those funds to provide scholarships to eligible students within the same state in which the organization is approved and listed. To participate in the program, an SGO must appear on its state’s official list of approved organizations and meet the requirements established under Section 25F.
This structure is intended to direct private funding toward student scholarships while creating accountability measures for organizations responsible for administering the funds.
How the Program May Benefit Students and Families
The FSTC may help expand access to educational opportunities by increasing the amount of scholarship funding available through private charitable giving.
Eligible students may receive scholarships to help cover qualified elementary and secondary education expenses. To qualify, a student must be eligible to enroll in a public elementary or secondary school and be part of a household whose income for the calendar year preceding the scholarship application does not exceed 300% of the area median gross income.
Because scholarship eligibility is determined and verified by participating SGOs, schools and families should be aware that program requirements extend beyond simply applying for assistance. Organizations administering scholarships must verify household income and family size before awarding funds.
What Expenses May Scholarships Cover?
Scholarships awarded through participating SGOs may be used only for qualified elementary and secondary education expenses.
Eligible expenses may include:
- Tuition
- Fees
- Room and board, uniforms, transportation and supplementary items (e.g., extended day programs)
- Academic tutoring
- Special needs services for a special needs beneficiary
- Books and educational materials
- School supplies
- Other qualifying educational expenses
These expenses may be incurred at public, private, or religious schools, provided they meet the requirements established under the statute.
What Schools Should Know About Scholarship Granting Organizations
The success of the program depends largely on SGOs and their ability to administer scholarship funds in accordance with federal requirements.
To qualify, an SGO must:
- Be an organization described in Section 501(c)(3) that is exempt from tax under Section 501(a)
- Not be classified as a private foundation
- Maintain separate accounts exclusively for qualified contributions
- Comply with all applicable Section 25F requirements
- Appear on the participating state’s approved SGO list
In addition, SGOs must satisfy several operational requirements intended to ensure scholarship funds are used appropriately. For example, an SGO must provide scholarships to at least 10 students who do not all attend the same school. The organization also must spend at least 90% of its income on scholarships for eligible students and use scholarship funds only for qualified educational expenses.
The law also prohibits SGOs from earmarking contributions for a specific student. Donors cannot direct their contributions to benefit a particular individual or family. Instead, scholarship awards must be administered through established eligibility and award processes.
How Elementary and Secondary Schools Can Prepare
Although schools do not administer the tax credit, they can play an important role in helping families understand potential scholarship opportunities.
Schools may consider the following actions:
Monitor State Participation
Participation in the FSTC program depends on whether a state elects to participate. Schools should stay informed about their state’s status and monitor announcements regarding approved SGOs.
Understand Available Scholarship Opportunities
As states submit approved SGOs to the IRS, schools can become familiar with organizations operating in their area and the types of scholarships they may offer.
Educate Families About Potential Eligibility
Schools may help families understand how the program works and when scholarship opportunities become available. However, schools should avoid implying that students automatically qualify for assistance. Eligibility determinations remain the responsibility of participating SGOs.
Communicate Carefully With Donors
Because contributions cannot be designated for a specific student, donor communications should focus on supporting scholarship access broadly rather than benefiting individual students or families.
Key Takeaways for Elementary and Secondary Schools
The Federal Scholarship Tax Credit may serve as an important new source of scholarship funding beginning in 2027, but participation and implementation will depend on state action and SGO administration.
Elementary and secondary institutions should:
- Monitor whether their state elects to participate in the program.
- Stay informed about approved SGOs operating within their state.
- Educate families about potential scholarship opportunities without promising eligibility.
- Understand the program’s income-based eligibility requirements.
- Ensure donor communications align with the prohibition on student-specific contributions.
By taking a proactive approach, schools can better position themselves to help families navigate new scholarship opportunities as the program becomes available.
For more information about how the Federal Scholarship Tax Credit may affect your school, organization or family, connect with CBIZ for guidance.
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