The Federal Scholarship Tax Credit was created through federal legislation enacted in 2025 to encourage private contributions that support K–12 educational expenses for eligible students. As states consider whether to participate and federal agencies continue to develop implementation guidance, education leaders are working to understand what the new program could mean for schools, families, and communities. 

Beginning January 1, 2027, individual taxpayers may be able to claim a federal tax credit of up to $1,700 for qualifying cash contributions to approved scholarship-granting organizations (SGOs). For the credit to be available, a state must elect to participate and provide the IRS with a list of qualifying SGOs. The Federal Scholarship Tax Credit (FSTC), also known as the Education Freedom Tax Credit, could create new educational opportunities for families while raising important questions about implementation, oversight, and equitable access. 

To explore what state and local leaders should know about the program, the Strategic Funding and Finance Center spoke with Kristin Blagg, a principal research associate at the Urban Institute whose work focuses on K-12 and higher education finance policy. 

The following conversation has been edited for length and clarity. 

Q: How does the federal program differ from existing state scholarship tax-credit programs? 

Blagg: Many state tax-credit programs focus on scholarships for private school tuition. The FSTC program is different because it resembles an education savings account model in some ways, allowing a wider range of educational expenses to be supported.

Another important difference is who can contribute. Many state programs rely heavily on business donations. Under the new FSTC, donations come from individual taxpayers, each subject to the $1,700 limit. 

That may create both opportunities and challenges. On one hand, individual taxpayers will be able to choose which organizations they support. On the other hand, SGOs may have to educate many potential donors about a credit that works differently from a traditional charitable contribution. That distinction will matter because SGOs will need to help potential donors understand how the credit works. Raising funds from thousands of individuals requires a very different strategy than securing a handful of large business donations. 

Q: What types of organizations might become scholarship-granting organizations, and what questions still need to be answered?

Blagg: Some organizations that already administer state tax-credit scholarship programs are exploring how to participate in the federal program. Private school networks may also establish or partner with SGOs. At the same time, there's growing interest in whether public schools and districts could benefit from the program. 

One reason there is so much interest is that the scholarships may be used for a broader range of educational expenses than traditional tuition-based scholarships. Depending on future guidance, eligible expenses could include supplies, technology, tutoring, field trips, uniforms, or other school-related costs. 

At the same time, many implementation questions remain unanswered. States, schools, SGOs, and families are waiting for clarity on which expenses qualify, how scholarship eligibility will be documented, how spending will be monitored, and whether organizations will be able to prioritize students with greater financial need. Because the income eligibility threshold is broad, a large share of families could potentially qualify, making these decisions especially important. 

Q: What should states consider as they decide how to participate? 

Blagg: States should pay close attention to Treasury and IRS rulemaking (expected in September 2026) because the regulations will help clarify what authority states have to shape the program and what guardrails may be available. 

Although they likely won’t be able to impose substantial oversight requirements only on SGOs, states should examine their existing systems for overseeing private schools and charitable organizations. Leaders may want to consider whether current reporting and accountability structures are sufficient and how implementation decisions align with broader state education goals. 

The answers will vary by state, but the key question is whether participation can be structured in a way that supports each state's priorities while providing effective oversight.

Q: What opportunities could the program create for public schools and their students? 

Blagg: This is one of the most interesting questions because it remains largely unexplored. 

If the final rules permit it, public schools may be able to partner with parent organizations, community groups, local scholarship initiatives, or SGOs to provide access to services such as tutoring, afterschool programs, field trips, or other educational opportunities. For districts looking to expand opportunities for students, that could be significant. 

However, there are very few established models showing how this would work in practice. Public schools will need clear guidance, strong partnerships, and straightforward administrative processes to ensure families can access available resources. 

Q: What risks should leaders keep in mind? 

Blagg: One concern is whether donations will flow to the communities with the greatest need. The places most able to generate contributions may not be the same places serving the largest numbers of low-income students. 

There are also important oversight considerations. Programs that allow a broad range of educational expenses can be challenging to monitor, and states and SGOs will need systems that balance flexibility with accountability. 

Finally, leaders should think carefully about accessibility. Families with the greatest need are often the ones most likely to face barriers during application processes. Wherever possible, application and eligibility procedures should be clear, efficient, and easy for families to navigate. 

Q: If you could leave state and local leaders with one takeaway, what would it be? 

Blagg: The key theme is that this program presents both opportunity and risk. 

There is substantial flexibility built into the design, which means states and communities may be able to fund local needs and priorities through SGOs. That flexibility creates opportunities to think creatively about how students and families might be able to benefit from a scholarship. 

At the same time, flexibility requires careful planning. Leaders will need to think about accessibility, oversight, and alignment with existing policy goals. 

The decisions being made now will shape how the program functions in practice. For that reason, state and local leaders should approach this moment with both creativity and caution.