The $1,700 Question
A guide to the new federal tax credit scholarship program | Model Policy, 02
Read the full analysis below, or start with the key takeaways:
What it is: The first federal tax credit scholarship program. Donors give to nonprofit scholarship organizations (SGOs), get a dollar-for-dollar tax credit up to $1,700, and SGOs award scholarships to students for tuition, tutoring, supplies, and more.
What it isn’t: It’s not a voucher. No public money goes directly to parents. It’s a tax incentive for private giving.
Who’s eligible: Families earning up to 300% of area median income — roughly 85–90% of the population.
What’s new: No aggregate funding cap, nearly universal eligibility, minimal federal regulation of schools and SGOs, and a state opt-in structure with no single entity running the show. Taxpayers in state that don’t opt in can still get the tax credit by donating to SGOs operating in other states.
Where things stand: Five states have formally opted in. Twenty-eight governors say they will. The program starts January 1, 2027, but key rules — including SGO list deadlines and the per-taxpayer vs. per-return question — are still unresolved.
The bottom line: This program will neither save nor destroy American education. It will expand what existing SGOs already do, create incentives for new ones to form, and leave most oversight to the states. The details will determine whether it works.
On July 4, 2025, the first federal tax credit scholarship program in American history was signed into law as part of the One Big Beautiful Bill.
It’s a big deal, and almost nobody is explaining it well. There’s a lot of noise about what it is, what it isn’t, who it helps, who it hurts, and so on. Most of it is wrong, or at least incomplete.
I know this because I was part of the team that passed Illinois’ tax credit scholarship program. I wrote the bill and lobbied for its passage in the state’s capitol. I was also the primary liaison for rulemaking between the coalition of organizations that advocated for the bill and the Departments of Education and Revenue, who shared implementation duties.
Long story short, I know how these programs work and how they’re implemented. So if you want to understand what the federal tax credit scholarship program is actually all about, keep reading.
What It Isn’t and What It Is
Before I explain key parts of the program, it’s best to say what the law isn’t.
It’s not a voucher. A voucher takes public money and sends it to a parent to directly pay for education expenses. It’s also not a personal tax credit. A parent cannot claim it if they incur education expenses for their child.
A tax credit scholarship program is different. It incentivizes private individuals to donate to nonprofit organizations — called scholarship granting organizations, or SGOs — and gives those donors a credit on their taxes in return. The SGOs then turn around and award scholarships to eligible students for eligible expenses.
Most state-based tax credit scholarship programs only provide scholarships for tuition to private or outside-of-district public schools. Only three provide scholarships for additional education expenses. They are located in Florida, Missouri, and Utah.
It is these programs, which are often called tax-credit ESAs (short for education savings account), that the federal tax credit scholarship program is most like. The only difference is that tax-credit ESAs are only available to students who exit the public school system while federal tax credit scholarships are available to both public and private school students. Eligible expenses under the federal tax credit scholarship program are more expansive than just tuition — they mirror those allowed in the Coverdell Education Savings Account Program. These include tuition and fees; books, supplies, and equipment; special needs services; tutoring; uniforms; transportation; and supplementary items and services.
The Mechanics
Here’s a breakdown of how the money flows through the program:
A taxpayer donates cash to a qualified SGO. Under the new federal program, that donor gets a dollar-for-dollar, nonrefundable tax credit of up to $1,700 — meaning their federal tax bill drops by exactly the amount they donated, up to that cap. It’s not a deduction, which merely reduces your taxable income. It is a credit, which reduces your actual tax liability dollar-for-dollar. It’s one of the most generous federal tax incentives for charitable giving.
The SGO — which must be a 501(c)(3) nonprofit — is then required to use at least 90% of the money it takes in on actual scholarships. It can keep up to 10% for administrative costs. Those scholarships go to students whose household income doesn’t exceed 300% of their area’s median income.
That “area median” piece is important — it’s not a flat national number. It varies by where you live, which means the eligibility threshold in Manhattan ($437,400) looks very different from the threshold in rural Mississippi ($150,000). It also doesn’t adjust for family size, unlike the federal poverty level.
The SGO must also distribute scholarships to at least 10 students who don’t all attend the same school; it has to prioritize renewals and siblings before awarding new scholarships; and it cannot give scholarships to the relatives of board members or significant donors to the SGO.
What Makes the Federal Program Different
If you’ve followed tax credit scholarships at the state level, a lot of the federal program will look familiar. But there are several things about the federal version that break the mold.
First, let’s start with the cap, or rather the lack of one. Most state tax credit scholarship programs have an annual funding cap. Florida’s is over a billion dollars. Illinois’ was $75 million. These caps exist because state legislators want to control how much revenue they’re forgoing. The federal program has no aggregate cap. The $1,700-per-taxpayer credit is capped individually, but there’s no ceiling on how many taxpayers can claim it.
Estimates on how much the program will cost are all over the place. The Joint Committee on Taxation — the body that calculates the cost of federal tax policy — estimates that the credit will raise $563 million in its first year, and nearly $3.5 billion a year thereafter, resulting in a total $26 billion cost over ten years. Democrats for Education Reform — an advocacy organization that supports the program — estimates that the tax credit could cost as much as $24 billion a year.
It’s hard to know which of these will be closer to reality once the first year is complete. Most state-based tax credit scholarship programs, save a few, have high caps on individual donations. Illinois’, for example, allowed donations up to $1 million annually. Because of this, most SGOs solicit donations from wealthier individuals. The result? In most state-based programs, between 1–2% of taxpayers give.
The federal tax credit is an entirely different animal. The max a tax filer can get a credit for is $1,700. This means that in order for SGOs to raise significant money, they will need to have much larger scale taxpayer outreach operations. Many SGOs, especially those that only operate in a single state, have never done that before.
Second, the federal program lacks something most mature state programs have built in: a mechanism for directing more resources to the students who need them most. The law says students whose household income is at or below 300% of area median gross income are eligible, and that’s it.
That’s a departure from how many state programs handle it. Illinois’s tax credit scholarship program used a tiered system — families at lower income levels received larger scholarships, and the amount decreased as income went up. It was designed to ensure that the students with the greatest financial need got the most help. Texas’s new Education Freedom Account program — an ESA, not a tax credit, but instructive as a comparison — uses a multi-tiered prioritization system. Students with disabilities from lower-income households get first priority, followed by students from families at or below 200% of the federal poverty level, then those between 200% and 500%. Families above 500% are admitted last and capped at 20% of the program’s total funding.
The federal program makes no such choice. A family earning $290,000 in a high-cost metro area is treated the same as a family earning $40,000 in rural Appalachia. The SGO decides who gets a scholarship, how much they get, and on what basis — within the broad parameters of the law. Some SGOs will prioritize low-income families because that’s their mission and that’s what their donors expect. Others may not.
Third, there’s the eligibility threshold. At 300% of area median income, the pool of families whose children are eligible for a scholarship is significant. Some estimates put it at 85 to 90% of the population. This tracks with what’s been happening at the state level over the past few years, where the trend has been moving decisively toward universal eligibility. States like Florida, Arizona, Arkansas, and Alabama have already opened their programs to all students regardless of income. West Virginia and Iowa went universal out of the gate. While the federal program has a cap, it is nearly universal. This is not the tax credit scholarship program of yore, which focused almost exclusively on working class and low-income families.
Fourth, the federal program doesn’t impose many of the requirements on private schools and SGOs that are present in many state-based programs. An analysis by the Government Accountability Office in 2019 found that nearly two-thirds of states require schools to be accredited by the state or a state-approved entity and 50% of states require private schools to give their scholarship students the state test or a nationally normed test in order to participate. The federal tax credit scholarship program has no such requirements.
The same is true for SGO regulations. While they do have to ensure that they are giving scholarships to eligible students for eligible expenses, and are not spending more than 10% on administrative costs, SGOs do not have to meet the same requirements found in state-based programs. Case-in-point: 86% of states require SGOs to undergo a financial audit or independent financial review in order to participate in their tax credit scholarship programs. The federal program does not.
Furthermore, there are no regulations on non-school education providers. Who can tutor under the federal tax credit program? The law doesn’t say.
Compare that to Florida. Under Florida law, part-time tutors receiving scholarship funds must hold a valid Florida educator’s certificate, an adjunct teaching certificate, a bachelor’s or graduate degree in the subject area they’re teaching, or certification from a nationally recognized research-based training program approved by the state Department of Education. Full-time private tutors have additional requirements — they must comply with attendance recordkeeping, reporting to the state board of education, and limits on how many students they can serve at once.
Lastly, there’s the opt-in structure. The federal government created the program, but it doesn’t run it. States have to affirmatively choose to participate, and the governor — or whoever state law designates — is the one who makes that call. There’s no federal agency overseeing day-to-day operations. The Treasury Department and IRS handle the tax credit side. The states handle the SGO side. If you’re looking for a single entity that’s solely accountable for the program, you won’t find one.
One final note on the opt-in. If a Governor — or the entity the law designates — decides not to participate in the program, it does not prevent taxpayers in their state from donating to SGOs in other states. It only prevents SGOs in their states from raising donations through the tax credit and giving scholarships under the program. This fact has been a key argument for advocacy groups wanting Democratic governors to opt-in. It’s one that was mentioned by Colorado Governor Jared Polis when he was interviewed by the 74 about why he chose to have his state opt-in even when other Democratic governors are choosing not the participate:
“I think most, if not all, Democratic governors will get there as they learn about the chance to boost charitable contributions in their state. If there are states that don’t, for some reason, people in those states can still give to charities in states like Colorado. In other words, taxpayers everywhere will be able to get the tax credit. But if a particular state doesn’t opt in, then the donors in that state would be giving out of state. I do believe states will opt in as they see the opportunity for additional donations to help at-risk kids and middle-class kids in their state.”
Where Things Stand
The program doesn’t go live until January 1, 2027, but the machinery is already moving.
On December 12, 2025, the IRS issued Revenue Procedure 2026-6, which created the process for states to make an “advance election” to participate. The mechanism is straightforward: submit IRS Form 15714, a simple one-page form that signals your state’s intent to opt in. The form doesn’t commit a state to anything binding on its own — it’s essentially a statement of intent. To actually activate the program, states must later submit a list of qualified SGOs to the Treasury Department. That second step — the one that actually matters — doesn’t have a deadline yet. The IRS has said it will provide guidance on the timeline and procedures in the future. So right now, we’re in a strange limbo: states are raising their hands, but nobody’s been told when to show up or what to bring.
As of early 2026, five states have formally submitted Form 15714: Virginia, Georgia, Idaho, Mississippi, and Montana. Two more — Alabama and Nebraska — have signed executive orders signaling participation, but haven’t filed the paperwork. Another eight — Arkansas, Indiana, Iowa, Louisiana, North Dakota, South Dakota, Tennessee, and Texas — have said they plan to participate but haven’t taken official action. In total, 28 governors have indicated they’ll opt in. Four have said they won’t: New Mexico, Oregon, Wisconsin, and Arizona, where the governor vetoed opt-in legislation. The remaining 18 governors and the mayor of D.C. haven’t announced a decision.
The political pattern is roughly what you’d expect. Republican-led states are moving quickly while Democratic governors are more cautious — but, it’s not a clean partisan split. Colorado’s Democratic governor, Jared Polis, has said he plans to opt in, calling it “free money.“ North Carolina’s Democratic governor, Josh Stein, vetoed a legislative opt-in bill, but said he’d participate once the federal government issues guidance.
Virginia is the state worth watching most closely right now. Before leaving office, Governor Glenn Youngkin submitted Form 15714 to the Treasury Department. But, he did something extra — he submitted an initial list of SGOs. He started with eight organizations — two Virginia-based, six national — and added five more within a week, bringing the total to 13. The IRS made clear that it wouldn’t actually process any SGO list submitted with the advance election form, so Virginia’s list was more of a political statement than a regulatory action. But, it sets the template for what participation looks like in practice.
What This Will Actually Look Like in Practice
If you listen to the loudest voices on either side of this debate, you’d think the federal tax credit scholarship is either going to save American education or destroy it. It’s going to do neither. What it’s going to do is something much more mundane, more complicated, and more human than either side wants to admit.
Let’s start with what’s probably not going to happen. The nightmare scenario critics love — wealthy donors funneling money to SGOs so rich kids can attend elite prep schools on the public’s dime — doesn’t match how these programs actually work. The families sending their kids to $40,000-a-year private schools aren’t waiting around for a scholarship funded by $1,700 donations. The income eligibility threshold is generous, yes, but the scholarship amounts that SGOs typically award don’t cover full tuition at high-end schools, and most established SGOs specifically target low-income families. The plumbing of this system — the intake forms, the income verification, the partner school networks — is built around families who need help.
What’s more likely is that SGOs are going to keep doing what they’ve already been doing, just with a new funding stream. Organizations like ACE Scholarships and Children’s Scholarship Fund have been awarding private school scholarships for decades. They have infrastructure, staff, partner school relationships, and waitlists. The federal tax credit gives their existing donors a new incentive to give and potentially brings new donors to the table. In states that already have tax credit scholarship programs, the federal credit will layer on top of what’s already there. An SGO in Florida or Alabama isn’t going to reinvent itself. It’s going to use the additional revenue to serve more families off its waitlist or increase award amounts. For these organizations, this is a capacity expansion, not a paradigm shift.
That’s the optimistic version, and in a lot of cases it’ll be accurate. But here’s where my experience makes me nervous. Not every SGO is a well-run nonprofit with a 20-year track record. The federal program is going to create an enormous financial incentive for new SGOs to form, and not all of them will be good actors. When you create a dollar-for-dollar tax credit with no aggregate cap, you are building a magnet for money. And, where money flows, opportunists follow. There will be SGOs that spend too much on overhead and not enough on scholarships. There will be private schools that see this as a revenue stream first and an educational mission second. That’s not a reason to kill the program. But it is a reason to take the oversight question seriously, and right now, the federal law leaves most of that to the states.
An additional question is to what extent public and charter school students will benefit. After all, scholarships can fund tutoring, after-school programs, technology, transportation, and other expenses for these students. That’s technically true. It’s not entirely theoretical either — some of it is already happening. Step Up, Virginia!, one of the SGOs on Virginia’s list, explicitly serves both private and public school students, offering scholarships for private school tuition alongside funding for public school tutoring and assistance. EducationSuperHighway, another organization on the list, has spent its entire existence focused on public school connectivity and infrastructure.
But whether public school participation happens at any meaningful scale is a different question. The vast majority of the SGO ecosystem that exists today was built to serve private school families. That’s what most of these organizations know how to do. They have relationships with private schools. Their donor bases care about private school access. Their application processes, income verification systems, and scholarship distribution models are all designed around private school tuition. The organizations currently serving public school students in this space are the exception, not the rule.
Here’s a possible solution. Nothing in the federal law prevents public school district foundations — the 501(c)(3) nonprofits that already exist to raise private money for public schools — from registering as SGOs. These foundations are already set up to receive tax-deductible donations and distribute funds for educational purposes within their districts. If a district foundation qualifies as an SGO, it could accept donations under the federal tax credit and use those dollars to fund tutoring, after-school programs, technology, and other eligible expenses for students already in public schools. Similarly, nothing prevents public or charter school teachers from serving as tutors under the program. A teacher who tutors students outside of contract hours could be paid with scholarship funds, creating a new revenue stream for educators and a new service channel for families — all within the public school ecosystem. The infrastructure for this already exists in most communities. What’s missing is the awareness that it’s an option and the willingness of district leaders and state officials to build it into their SGO frameworks.
What to Watch Going Forward
There are a handful of things I’d be watching closely if I were a parent, an educator, a state official, or just someone who wants to know whether this program is going to work.
SGO List Deadlines
The IRS still hasn’t announced when states need to submit their finalized SGO lists to solidify their advance elections. That deadline will be the first real pressure point. Filing Form 15714 is easy — it takes 43 minutes to complete, according to the IRS. Building a vetted list of qualified SGOs that meet the statutory requirements is a different animal entirely. States that moved fast to file the advance election may find themselves scrambling when the actual deadline drops. Any state that fails to submit its SGO list in time gets locked out for 2027. No SGO list means no qualified organizations. No qualified organizations means no scholarships. The clock hasn’t started yet, but when it does, it’s going to move quickly.
What States Layer on Top
The federal law is deliberately thin on requirements for participating schools and SGOs. That means the real regulatory framework is going to be written by the states. The Treasury is currently evaluating how to handle this. Will it allow states to add nondiscrimination provisions, financial reporting requirements, academic accountability measures, or limits on who can be served, or will it require governors to serve more of a ministerial function, simply collecting the list of SGOs who qualify and submitting them to the Department?
The Virginia Question
Governor Youngkin opted Virginia in and submitted an SGO list on his way out the door. Governor Spanberger, a Democrat, now owns a program she didn’t choose. Does she leave it alone? Opt-out? Try to slow-walk implementation? What she does — and how the federal government responds — will set a precedent for every other state where a new governor inherits an opt-in decision made by a predecessor.
New SGO Formation
The existing SGOs that are included on Virginia’s list have track records you can evaluate. What I’m watching for is the wave of new organizations that will inevitably form prior to the program going live. A dollar-for-dollar uncapped federal tax credit is a powerful incentive, and it’s going to attract both mission-driven nonprofits and people who see an opportunity to skim 10% off the top of a new revenue stream. The first major scandal involving a poorly run SGO will be a defining moment for the program. How quickly it comes — and how states and the IRS respond — will shape public trust for years.
Donor Math
Here’s something most people haven’t thought about yet. The statute says the credit is up to $1,700 per taxpayer. For a married couple filing jointly, the assumption has been that means $3,400 — one credit per spouse. But that’s not settled. Treasury is currently working through whether the $1,700 limit applies per taxpayer or per return, and the answer has significant implications for the program’s fundraising potential. If it’s per return, you’ve just cut the maximum contribution from married couples in half.
Whatever the limit ends up being, it represents a fundamentally different model from how state-level tax credit scholarship programs have historically worked. Most state programs have relied on a smaller number of larger donors — businesses and wealthy individuals making five- and six-figure contributions. The federal program’s individual cap means it needs volume: millions of small donors each giving $1,700. But will they? Claiming a tax credit requires more effort than dropping money in a collection plate, and most Americans have never heard of a SGO. The program’s reach depends on whether these organizations can market themselves to an entirely new donor base. That’s a massive awareness and logistics challenge, and the answer will determine whether this program is a rounding error or a genuine force in reshaping K-12 education.
The 90/10 Question
The federal law requires SGOs to spend at least 90% of their revenue on qualifying scholarships, keeping no more than 10% for administrative costs. That sounds straightforward until you start asking what counts as revenue. Most established SGOs don’t operate on a single funding stream. They receive money from state tax credit programs, private philanthropy, corporate giving, endowment income, and soon, the federal tax credit. The question the Treasury is working through is whether the 90/10 requirement applies only to qualified contributions received under the federal program, or to the SGO’s entire operating budget.
The distinction is enormous. If it applies only to dollars raised through the tax credit, a SGO can maintain its existing overhead structure funded by other revenue streams and keep the tax credit money almost entirely dedicated to scholarships. But, if the Treasury interprets the requirement to apply to all revenue, it could create a serious problem for SGOs that have been operating sustainably for years. Organizations that spend 20% of their total budget on administration would suddenly be out of compliance, even if every federal dollar they receive goes directly to scholarships. It could force established SGOs to restructure their finances or, worse, discourage them from participating altogether. In addition, it would be particularly punishing for smaller organizations that don’t have the economies of scale to run on a 10% margin.
Where This Leaves Us
The federal tax credit scholarship program is coming. It will begin on January 1, 2027.
Whether the state you live in has opted-out, opted-in, opts in tomorrow, or holds out for final guidance, the federal tax credit scholarship is now a part of the tax code, and it’s going to reshape the K-12 education landscape in ways that aren’t fully predictable yet.
What I know from having done this at the state level is that the details nobody wants to talk about are the ones that matter most, especially the rules. That’s where this program will succeed or fail.
I support states opting-in to the program. I wouldn’t have spent years writing, lobbying for, and passing a tax credit scholarship program in Illinois if I didn’t.
However, I didn’t write this piece to convince you to support it, too. I wrote it because the conversation around the federal tax credit scholarship has been dominated by advocates selling a dream and opponents selling a disaster, and neither version is particularly useful.
If this new program from the One Big Beautiful Bill is going to help students as much as it possibly can, then parents and policymakers need to understand how it works and what it can realistically do.
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