On January 1, 2027, the heralded Federal Scholarship Tax Credit (FSTC) goes live. Enacted by Congress in 2025 as part of the One Big Beautiful Bill Act (OBBBA), it allows taxpayers to claim a dollar-for-dollar credit for donating up to $1,700 to scholarship programs. It’s the first national school choice program and is poised to rapidly become the nation’s largest, potentially supporting billions in scholarships each year. But now comes the hard part.
Just recently, the Treasury Department issued the rules for the program’s first year and proposed a draft slate of fuller, permanent rules. With the launch just weeks away, we’re getting more clarity about how this will shake out, including for the scholarship granting organizations (SGOs) that will collect contributions and bundle them into scholarships. Yesterday, in an AEI webinar, we dug into this with four of the nation’s leading authorities on the FSTC: Jim Blew, an adviser to the Federal Scholarship Tax Credit Coalition; EdChoice CEO Robert Enlow; Afterschool Alliance chief Jodi Grant; and veteran school choice lobbyist John Schilling. It’s worth watching in full, but a few points stand out.
First, there’s uncertainty about the dollars at stake. Blew said that about 100 million Americans owe at least $1,700 each year in federal income tax, yielding a universe of about $170 billion in potential funding. Schilling predicted an initial take-up rate of 10 percent and said he hopes to see donations of $25 billion annually. Enlow was more cautious, noting that first-year take-up in tax credit programs typically runs 1 to 3 percent, yielding perhaps $2 to $5 billion. Enlow’s figure is close to what the Joint Committee on Taxation predicted. Treasury is more bullish, projecting that by 2030, more than 11 million taxpayers could give nearly $26 billion a year. Panelists agreed that it was a big boost when Treasury clarified that married filers can claim a $3,400 credit ($1,700 each).
Second, the tax credit design gives a lot of sway to governors, as the OBBBA requires states to opt in to the FSTC. Thus far, 31 states have done so, including five with Democratic governors (though in Kansas, Kentucky, and North Carolina, legislatures overrode gubernatorial vetoes). States have until January 1 to opt in for 2027 and must do so again each subsequent year. A completed election can’t be revoked for that year, but a state can opt out in future years. Now, all taxpayers can use the credit, whether or not their state is participating, but their contributions can only fund scholarships in participating states. In a decision the panelists agreed was pivotal, Treasury made clear that governors who opt in cannot then restrict the kinds of scholarships to be granted.
Third, many kinds of scholarships will be permitted, including for tutoring, afterschool programs, and more. There remain questions, though, about just which sorts of programs will be eligible and whether they need to be housed in a school. The rules governing eligible programs are defined by the tax code’s Coverdell provision (Section 530), and Treasury’s deliberations are being closely watched. For instance, it’s not yet clear whether SGOs can only offer scholarships for tutoring if it’s school-based or whether they’ll be able to issue scholarships for afterschool programming at a 4-H club or Boys & Girls Club. Moreover, because Coverdell relies on state law to define what constitutes a “school,” Enlow noted that states may narrow their definition to bar SGOs from supporting scholarships for homeschoolers or microschoolers.
Fourth, there are inevitable concerns about waste, fraud, and abuse. The panelists argued that Treasury’s rules limit such risks via a 10 percent cap on administrative costs and a unique IRS donor number that allows every credit to be matched to a donation. Blew said he expects about 600 SGOs to ultimately participate, including about 20 national ones, and anticipates that the competition for contributions will force SGOs to deliver. And Enlow argued that EdChoice data show misuse rates of 2 percent or less in Arizona’s and Arkansas’s ESA programs, far lower than for programs such as SNAP.
Finally, the conversation turned to politics. With more than 100 House Democrats cosponsoring Rep. Gwen Moore’s bill to repeal the FSTC, and Democrats looking poised to reclaim at least the House in November, Schilling said it will likely pass the House. While he sees the FSTC as secure so long as Republicans control the White House, he expects that bill to become “a marker for 2029”—especially if there’s a Democratic White House. Schilling’s advice to FSTC supporters: The best way to prepare for a potential fight is to get lots of families benefiting from scholarships fast. History shows that once families have embraced new options, it’s tough for lawmakers to take them away.
RICK HESS is an author, scholar, and director of education policy studies at the American Enterprise Institute.
