A Lawmaker’s Guide to the Federal Education Freedom Tax Credit Scholarship Program

Last week, the Treasury Department released the long-anticipated regulations to implement the Federal Education Freedom Tax Credit Scholarship Program. Passed as part of the One Big Beautiful Bill Act (OBBBA), the program allows donors to claim a dollar-for-dollar credit against their federal tax bill when they donate to an approved scholarship-granting organization (SGO). Students receiving a scholarship can then use the funds on a variety of educational expenses at a public or non-public school.

By 2030, Treasury estimates that there could be 600-700 participating SGOs providing $26 billion in scholarships to 2.2 million students each year. A program of this size and scope will certainly alter the education landscape around the country as it brings education freedom to millions of students once implemented.

With the proposed rules now available, here is a rundown of the program and the most commonly asked questions. Read on for details about how states can participate, which students are eligible, how the new federal program will interact with existing state tax-credit scholarship programs, and more.

How does a state opt-in? What is the process for participating?

The law requires each state to affirmatively opt in to the program to participate, and 30 states have already done so. This can be done by any state’s governor or, if applicable, another authority that has been authorized by statute. This means that, for example, lawmakers in Arizona could require their state’s participation by statutorily providing another official or entity with opt-in powers.

Once a state has opted in, it must then provide a list of eligible SGOs to the Treasury Department. Once that list is submitted, the SGOs listed must register with Treasury and agree to the program’s rules in order to distribute scholarships.

What if my state hasn’t opted in?

 If your state has not opted in, then SGOs cannot distribute scholarships to students in your state. However, since this is a federal program, interested donors in your state are still free to claim the tax credit by contributing to an eligible SGO in another participating state. This means that a donor in California, which is not a participating state, can contribute to an SGO in Texas, which is participating, and still claim the full amount off their federal tax bill. Therefore, a state’s decision to opt out means denying its own students scholarship access under the program while simultaneously sending those dollars to other states for their students.

Which students are eligible for a scholarship? How can those funds be spent?

Any student in a participating state whose household income does not exceed 300% of the average gross median income where they live. This limit will also be adjusted based on household size. Treasury estimates that 96% of students in participating states will meet this requirement, meaning nearly every student will be eligible.

 Scholarship dollars can be spent on a variety of educational expenses, including tuition, fees, tutoring, special needs services, books, supplies, and other items connected with the student’s participation in a public or nonpublic school. Crucially, the rules proposed by Treasury specify that the term “school” will be based on how each state defines it. This means eligibility for homeschools and microschools, among others, will be dependent on state law.

It is also important to note that, under the rules proposed by Treasury, an SGO can restrict the list of eligible expenses and schools if desired. For example, one SGO could choose to only distribute scholarships to students with special needs while another could choose to exclusively distribute scholarships for tuition payments at a religious school.

What is the maximum tax credit that a donor can claim? How does this new federal credit interact with existing state credits for scholarship programs?

 The maximum federal credit that a donor can claim under the program is $1,700 (or $3,400 if married and filing jointly). Each dollar that a donor contributes to an eligible SGO earns them a one-dollar credit off their federal tax bill, up to these limits.

For states that currently operate their own tax-credit scholarship program, it is important to note that your program can operate alongside its new federal counterpart. Federal law stipulates that a donor’s contribution for federal tax purposes is reduced by any amount claimed as a credit on their state tax return. For example, let’s say a state offers a tax-credit scholarship program with a maximum credit of $250. If a donor provides $1,000 to an SGO participating in both the state and federal programs, then the donor can claim $250 off their state tax bill and the remaining $750 off their federal tax bill. Alternatively, a donor can designate their contribution as exclusively for the state program or the federal program, in which case the tax incentive they receive is based on the rules for whichever program they select.

Is there a cost for states to participate in the program?

 There is no cost for a state to opt into the Federal Education Freedom Tax Credit Scholarship Program. All a state needs to do is opt in and provide Treasury with a list of eligible SGOs. Once completed, donations made to these eligible SGOs on or after January 1, 2027, will be eligible for the federal tax credit.