Treasury and the IRS have released proposed regulations for a federal scholarship tax credit scheduled to begin January 1, 2027. Individuals who donate to approved scholarship organizations would receive dollar-for-dollar federal income tax credits, and those organizations would fund K-12 education expenses for eligible students.
The proposals were announced October 1 and are open for public comment through December 1.
Supporters see a major expansion of parental choice. Critics argue the program could shift federal resources toward private and religious schools without the accountability rules that apply to public schools.
Background
Congress created the Federal Scholarship Tax Credit, also called the Education Freedom Tax Credit, in the July 2025 law known as the One Big Beautiful Bill Act. It is not a conventional voucher: donors give to nonprofit scholarship-granting organizations, or SGOs, and the SGOs award the scholarships.
The proposed rule allows a credit of up to $1,700 a year for an individual and up to $3,400 for a married couple filing jointly, because each spouse is treated as a separate taxpayer with his or her own cap. The credit is nonrefundable, is reduced by any state credit for the same gift, and can be carried forward for up to five years. Only individuals qualify.
Scholarships go to students who live in a participating state and in households with income up to 300% of the area median. Treasury’s announcement estimates that about 96% of children in participating states would qualify under the proposed rules and safe harbors.
Eligible expenses include private school tuition, tutoring, special-needs services, books, supplies and computers tied to a student’s enrollment in a school. Treasury says separate guidance on allowable expenses is coming, so it is unclear whether costs such as homeschooling or after-school programs qualify.
How the New Rules Would Work
States must opt in, and a governor or other designated official makes the election. For 2027, a state must file an advance election by January 1, 2027, and submit its list of SGOs by February 15, 2027. Thirty states had made an advance election as of September 14, according to the IRS list. Most are Republican-led, though Colorado and North Carolina, with Democratic governors, appear on it.
SGOs must be public charities, spend at least 90% of income on scholarships, and file annual audits that states review. The rules bar states from adding SGO requirements that are stricter than federal law, such as limits on the type of school or the expenses scholarships may cover. States also may not use discretionary standards to exclude an otherwise qualifying SGO. A public hearing is set for December 15.
What Different Sides Are Saying
Supporters: More Options for Families
The administration says the credit lets families choose where and how their children are educated. Democrats for Education Reform, a Democratic-aligned group, says every dollar raised is in addition to existing school funding, K-12 Dive reported.
The administration also stresses that the program relies on private donations, and supporters argue that competition could raise school quality.
Fact-check: Donors receive federal tax credits, so the program is publicly subsidized even though donors choose where the money goes. Research on state school choice programs is contested, and this article could not find evidence that a federal tax credit alone would raise achievement.
Critics: Public Resources and Accountability
The National Education Association says the rules copy the worst features of state voucher programs. Americans United for Separation of Church and State argues the money will flow mostly to religious schools and to families who could already afford private tuition. Rep. Bobby Scott, D-Va., says private schools can ignore civil rights rules that public schools must follow.
Fact-check: Treasury’s estimate that the 300% cap covers about 96% of children means the cap excludes few families. Whether most scholarships go to families who would have chosen private school anyway depends on how SGOs set priorities, and no award data exists yet.
Critics also say lost federal revenue could squeeze public education, and note that many private schools are religious.
Fact-check: The credit reduces federal revenue but does not automatically cut state or local school budgets, which rest on separate formulas and enrollment. Courts have allowed indirect public aid to religious schools under certain conditions, and whether this program’s design fits those limits has not been tested.
The States: Participation and Control
Participation is voluntary, and both sides are lobbying governors. Chalkbeat reported that 18 Democratic governors have yet to decide, and that New York Gov. Kathy Hochul has said she plans to join unless she finds a “poison pill” in the program.
The central dispute is state power. Public Funds Public Schools, an Education Law Center campaign, says the ban stops states from adding safeguards against waste, fraud and discrimination. Supporters say it stops governors of either party from excluding groups for political reasons.
Fact-check: The rules do not remove all oversight. SGOs must file annual audits and certifications, and states must review them. What the rules bar is additional state restrictions on school type, spending categories and SGO eligibility.
How Much Could It Cost?
Treasury and the IRS project that by 2030 more than 11 million taxpayers could give nearly $26 billion a year and fund as many as 2.2 million scholarships annually. These are projections, not confirmed spending or enrollment.
Because the credit is dollar-for-dollar, gifts of that size would imply a similar order of lost revenue, subject to donors’ tax liability and state credits. That is far above the Joint Committee on Taxation’s 10-year estimate of $25.9 billion, as reported by The College Investor. This article could not verify how the two figures reconcile or review the JCT document directly.
Note on Scope
The credit is law, but the regulations are proposed, so no scholarships have been awarded. The state list can still change until governors’ January 1 deadline.
Related Links
- IRS: Education Freedom Tax Credit Announcement
- Federal Register: Proposed Scholarship Regulations
- Federal Register: Temporary Regulations
- IRS: Participating States for 2027
- K-12 Dive: Reactions to the Rules
- Chalkbeat: Democratic Governors and the Credit
Discussion Questions
- Have you ever received a scholarship or tax benefit for education? How did it shape your choices?
- Is a tax credit for private donations meaningfully different from direct government funding?
- Should schools that receive scholarship money follow the same accountability rules as public schools?
- Should states be able to add safeguards for scholarship groups, or should federal rules be the only limit?
- Would greater school choice necessarily improve educational quality?
- Should federal tax credits support religious education?
- Who is likely to benefit most: families changing schools or families already in private school?
- How should the government measure whether this program works?
- Why has school choice become so politically divisive in the US?
- Imagine you are a governor deciding whether to opt in. What would you decide, and why?
