FEDERAL SCHOLARSHIP TAX CREDIT
A Second Funding Layer:
What the Federal Scholarship Tax Credit Pays For
Treasury published the rules for the Federal Scholarship Tax Credit, the IRS’s name for the Section 25F credit, on October 2, 2026. The temporary regulations govern the donors and the organizations that raise the money, and the proposed regulations govern who qualifies and how a provider gets paid.
Section 25F created a federal tax credit that begins January 1, 2027, and Treasury published the rules on October 2, 2026. An individual gives cash to a scholarship granting organization and claims a credit of up to $1,700, and the organization awards scholarships from what it raises.
What those scholarships may buy is not tuition alone. The statute borrows the expense list that Coverdell education savings accounts use, which covers academic tutoring, books, supplies, other equipment, and computer technology and internet access alongside tuition and fees. That puts the companies already selling into the twenty-four state education savings account programs in front of a second funding source, available in thirty states rather than eighteen.
Where the money comes from.
The credit, and who claims it.
An individual taxpayer who contributes cash to a scholarship granting organization may claim a nonrefundable credit against federal tax, capped by statute at $1,700 a year and claimed on Form 8525. The cap sits on the taxpayer rather than on a child or a school, so nothing in this half touches a provider directly. It still determines how much money exists to be spent and in which states.
What a scholarship granting organization is.
A scholarship granting organization is a charity, exempt under 501(c)(3) and not a private foundation. It keeps contributions for this credit in a segregated account and appears on a list of its state files with the IRS. The regulations add operating conditions: it awards scholarships to 10 or more students who do not all attend the same school, and it spends not less than 90 percent of its income on scholarships for eligible students.
It may not let a donor earmark a gift to a particular student, it verifies that each expense qualifies, and it files an annual financial and programmatic audit. Each of those conditions is easier for an organization with an operating history than for a new charity.
Two of the largest state-program administrators have already moved, and both did so on the donor side. Florida’s Step Up For Students announced on January 28, 2026 that it will administer the federal program through the Step Up, Step Further Scholarship Fund, a separate 501(c)(3) established for the purpose. The Children’s Scholarship Fund, which administers New Hampshire’s program, now publishes donor-facing pages identifying itself as a qualified organization, last updated October 3, 2026.
Step Up is forming a new nonprofit rather than using the one it already runs, and the reason is the rules: a segregated account and an annual audit are easier to set up in an organization built for them than inside one already running a state contract. I expect that pattern to repeat, which means the organization a provider applies to may be brand new even when the people running it are the ones who already run the state program.
What a state has to do.
A state’s governor, or whoever state law designates, makes the election on Form 15714. For 2027, that election is due on or before January 1, with until February 15 to perfect it by filing the list of organizations. In later years, the advance election window runs from January 2 to September 30 of the preceding year, so 2027 is the compressed cycle.
The election covers one calendar year and cannot be revoked once completed. In certifying an organization, the state attests that it is located in the state, keeps the segregated account, meets the statutory operating conditions, and has filed its audit. A state may remove an organization through a procedure that gives it due process, and must report the removal to the IRS.
Which states elected, and which did not.
Thirty states had made the advance election as of September 14, 2026, on a list the IRS last reviewed two days later. They are Alabama, Alaska, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming. The June release counted twenty-seven, so the number is still moving.
Set that list against the twenty-four state programs on the States page and it splits in two. Seventeen of the eighteen states that run an education savings account program have elected in.
The exception is Arizona, whose 99,709 awards in the fourth quarter of 2025-26 are the largest participation figure the page carries. Arizona had not elected as of that September 16 list, and a state may elect for a later year, so this is a position on a date.
The other thirteen run no program among the twenty-four, though Montana’s one account program is not making a new award for 2026-27. That seventeen and thirteen split is my own count from the IRS list set against the States page, and neither source publishes it, so it is a planning frame rather than a published figure.
How the money reaches a provider.
What the scholarships buy.
The statute does not write its own expense list, and instead borrows the one Coverdell education savings accounts use, at 26 U.S.C. 530(b)(3)(A). That list has three clauses, and the difference between them decides who can be paid and on what terms.
The first clause covers tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment at a public, private, or religious school. The second covers room and board, uniforms, transportation, and supplementary items and services including extended day programs, but only where the school requires or provides them. The third covers computer technology, equipment, internet access, and related services used by the student and the student’s family, and it excludes software for sports, games, or hobbies unless the software is predominantly educational.
The second clause is narrower than it looks, because the school has to be the party requiring or providing. A company selling a uniform or a bus service to a family directly sits outside it. The first and the third are not narrow at all, and a tutoring company, a curriculum publisher, a provider of special needs services, and a company selling devices or connectivity all sit inside the definition.
One qualifier runs through all of it, because the regulations determine these expenses under state law, so the federal list sets an outer boundary and each participating state narrows it from there. That is the structure the state programs already run on, where an administrator’s handbook rather than a statute decides what a family may buy.
How a provider gets paid.
The proposed regulations set out four routes, and three of them reach a provider rather than a school. Expenses the school charges, including tuition, fees, and room and board, are paid directly to the school, which is the route carrying the most money and the least relevance here.
An organization may reimburse a family that submits receipts, once it has verified that the expense qualifies. It may pay a vendor directly where the vendor has been verified as an appropriate provider. It may also run disbursement through a qualified digital wallet, which the regulations describe as an electronic payment platform in which a third-party provider supplies a streamlined interface.
Vendor verification, which the rules leave open.
Verification is the step that decides who is allowed to be paid, and the proposed regulations do not yet say what it involves. They set the condition that the vendor has been verified as an appropriate provider, and they leave the method to the organization.
I read what the two organizations furthest along have published, and neither addresses it. Step Up For Students lists the federal credit as coming soon. The Children’s Scholarship Fund’s federal pages and FAQ, updated October 3, 2026, cover donor eligibility, credit amounts, and donation mechanics, with nothing on allowable expenses, vendor approval, or how a payment reaches anyone.
It does mean the donor side of this credit is being explained in public while the receiving side is not. That asymmetry is the reason a provider is reading proposed regulations rather than a handbook.
The state programs are the only working model, and there a provider applies to the administrator, is checked against the program’s allowed expense categories, and is listed before any family can spend with it. Approval runs per program, and a clearance in one state does not travel to another.
I expect federal verification to land close to that, for two reasons. The organizations most likely to be listed already run approval processes under state contracts, and the annual audit gives them a reason to document who was paid and why. If that holds, a provider already approved in a state program has most of the evidence an organization would ask for, and the work is assembling it rather than creating it.
Who qualifies.
Eligibility turns on household income not greater than 300 percent of the area median gross income. An organization may verify income directly, accept categorical eligibility through participation in SNAP, TANF, WIC, Section 8, or SSI, or rely on safe harbors for tutoring in low-income areas and for children in foster care. One of those safe harbors is specific to tutoring in low-income areas, and it attaches to where the service is delivered rather than to a household’s paperwork.
The income test is not the constraint a provider plans around, and what caps volume is the credit itself and how many donors in a state claim it. That makes donor behavior the number worth watching. Nothing published yet measures it.
What an award is worth.
The scholarship a student receives is not the credit a donor claims. An organization aggregates contributions and awards from that pool, so the size of an award depends on how many donors in a state claim the credit and on how the organization divides what it raises. There is no formula to look up and no published average to plan against.
A state program works the other way around, assigning an award to a named student by formula or by statute, and the family spends against that balance. The federal credit sets no award at all, and nothing about a given student determines what any particular scholarship is worth.
The dates and what is still open.
When a learner can actually spend it.
Neither document answers this, and the silence is worth more than a date would be. Section 25F applies to taxable years ending after December 31, 2026, and Treasury’s stated reason for issuing temporary rules at all was to give donors certainty before contributions begin on January 1, 2027. Past that point, the rules set no deadline for awarding a scholarship and none for paying one out.
Two provisions push against delay. The 90 percent spending requirement counts money as spent when it is paid. Hence, an organization that raises in 2027 has a reason to pay in 2027, and the priority rule puts last year’s recipients and their siblings first, so the first cohort it awards is the cohort it keeps.
I expect the first dollars to reach a provider in the second half of 2027, and the 2027-28 school year to be the first one a scholarship is spent against. That is my read from the sequence rather than a date anyone has published: a state lists its organizations, donors give, the organization awards, and only then does a family have something to spend.
The dates that bind.
On the state and organization side, there are three dates. A state elects by January 1, 2027, an organization registers through the IRS portal before it appears on any state list, and the state files that list by February 15, 2027. An organization that is not on the list cannot receive credit-eligible contributions, and a state cannot add one after the deadline.
On the provider side, there is no deadline, because there is no federal registration for a provider, and the gate is an organization’s own verification. The temporary regulations take effect December 1, 2026, and expire October 1, 2029, so the rules a provider learns in 2027 are rules Treasury has already committed to rewriting.
The comment window.
Comments on the proposed regulations are due December 1, 2026, and a public hearing is set for Tuesday, December 15, 2026 at 10 a.m. Eastern. A request to speak, with an outline, runs to the same December 1 date, and a request only to attend is due by 5 p.m. Eastern on December 10.
Comment files on rules of this kind are filled by the regulated parties and their trade associations: the scholarship organizations that will be listed, the state agencies that will certify them, and school associations. Those comments argue about definitions, about the compliance cost of the audit and verification requirements, and about timing.
Nobody filing a comment is obliged to describe how any of this works for the company getting paid. A provider can file one and tell Treasury what vendor verification and receipt reimbursement would mean in practice, and nothing in the proposed text suggests Treasury has heard that yet. Few will, which is most of the argument for being one that does.
Where this sits against the state programs.
The States page counts twenty-four education savings account programs in eighteen states, on a test with four conditions. Money is held in an account for a named student, the parent directs it, the account pays for more than one kind of expense, and the program is making a new award for the 2026-27 school year.
Section 25F fails two of the four: there is no account for a named student, and no parent directing it. The regulations published this month confirm that rather than change it.
The organization holds the contribution, decides who receives a scholarship and how much, verifies each expense, and pays the school, the vendor, or the family against receipts. A parent chooses what to ask for, and a parent does not direct an account.
That is the difference, and it is why this is a category of its own rather than a twenty-fifth program. A state program is a funding formula attached to a student, and the federal credit is a funding source attached to an organization. Both can pay the same company for the same thing without being the same instrument.
I expect the thirteen electing states with no program of their own to be the more interesting half through 2027. Where a state already runs a program, a provider is adding a funding source to a market it has entered. In the other thirteen, the federal credit is the market, and the approval path runs through organizations that do not exist yet.
Thirty states opted in. The work starts now.
Sources & limitations. Everything above traces to public primary sources, read October 4 and October 7, 2026. What is not publicly available is listed.
