Federal Scholarship Tax Credit guidance preview: What the field needs to know

On June 9, 2026, Kevin Salinger, Deputy Assistant Secretary of Tax Policy at the Department of the Treasury, previewed initial guidance on the upcoming Federal Scholarship Tax Credit (FSTC). The FSTC, which goes into effect on January 1, 2027, was enacted last summer as part of H.R. 1, a sweeping tax bill passed through the reconciliation process.

Assistant Secretary Salinger reported that the complete draft guidance would be available by late September and would act as the operative regulations for 2027, the first year of the program. Treasury expects to collect and respond to feedback in final guidance ahead of the 2028 tax year.  Salinger also mentioned that Treasury will publish non-regulatory guidance on the eligible uses in the tax credit related to the Coverdell Education Savings Accounts (known as section 530)  following the draft guidance in September. ­­­

What is the FSTC?

The FSTC, known by Treasury as “25F,” allows any taxpayer to redirect up to $1,700 of their annual federal tax bill to nonprofit Scholarship Granting Organizations (SGOs). States must opt into the program in order for SGOs to distribute donations to students in their state. Approved SGOs must distribute at least 90% of those funds as scholarships to eligible students for a broad range of approved uses—including private school tuition, tutoring, transportation, and afterschool and extended day programs. Up to 90% of students are expected to be eligible. For more background, visit our Scholarship Tax Credit webpage.

Some key highlights from the previewed guidance:

• Safe harbor on organizational income: Nonprofit SGOs whose activities are “largely scholarship granting organizations” would be able to keep their 25F contributions and income in a segregated account. For these organizations, the 90% requirement would be limited to the funds in that specific account, instead of the organization’s total income. The definition of “largely” is expected in the draft guidance. This most likely means current nonprofits that are not largely focused on scholarship granting would need to spin off new 501(c)(3) organizations.
   
• Multi-state SGOs: For SGOs that want to operate across states, they would not need a physical location in every state. They would need to be authorized to do business in that state and keep a specific 25F account for each state in which they operate.
   
• Student eligibility: Encouragingly, the previewed guidance allows families multiple pathways to document their household income, including through paystubs and participation in needs-based federal programs that set income limits below the federal threshold. Also under consideration is area eligibility for all students attending schools in low-income areas.
   
• State ability to vet their SGO lists: Treasury clarified, “States may not impose substantive SGO-specific requirements that are more restrictive than section 25F’s requirements.
   
• Audits: Treasury expects each SGO would need to “obtain an annual financial and programmatic audit by a qualified third party” or for smaller SGOs to have an internal committee audit. “Smaller” is not further defined.

Future guidance on eligible uses: In addition to the guidance expected by late September, Treasury also plans to provide more information on how it interprets eligible expenses (section 530) under the law. This is an especially critical area for afterschool providers who often operate across a broad landscape of school-based, community-based, and faith-based settings. The additional non-regulatory guidance, as Treasury stated below, is expected to be delivered as a separate workstream to follow the release of the overall program regulations.

We recognize that additional guidance under section 530 regarding the scope of eligible expenses will be important, and we expect that to be a separate workstream that will follow the issuance of the section 25F proposed regulations. Consistent with the statutory text of section 530, we fully intend that scholarships may be used to support additive academic tutoring and special needs services, and we expect future guidance to address those issues in more detail.

We are glad to see Treasury’s recognition of the importance of this issue. Treasury’s timeline to provide additional clarification on eligible uses (coming after the late September regulations) is not ideal for afterschool programs preparing now to engage with 25F. However, the impact for families of a clear, broad definition—allowing them to access the programs that best fit their needs—could be enormous. The Afterschool Alliance responded to Treasury’s recent Request for Recommendations to Treasury’s 2026-2027 Priority Guidance Plan, encouraging Treasury to prioritize the timely adoption of definitions in section 530 (Coverdell Accounts) that reflect the current afterschool and summer landscape, ensuring programs on and off school sites would be eligible. These definitions also promote the legislation’s role in maximizing family choice and student educational development opportunities.

What’s next for participating states:

1. For organizations considering becoming SGOs in the afterschool space:
   • Make your best determination as to whether your organization qualifies for safe harbor
   • If not, begin exploring 501(c)(3) formation to be ready for January 2027 specifically to operate the FSTC
   • If becoming an SGO is not practicable before January 2027, aim to identify other SGOs as potential partners for your work
      
2. For programs that want to accept scholarships from SGOs on behalf of eligible students in their community:
   • Consider what the FSTC could mean for your program if the Treasury definition recognizes the full landscape of afterschool programs and what it could mean under a narrower (school-funded or school-based only) program definition
   • Aim to identify SGOs that already exist and can connect students with your program or that are forming to offer scholarships for afterschool and summer
   • Consider how to begin to educate taxpayers about the opportunity to donate to scholarships specifically for afterschool and summer programs
   • Create a plan for how you might engage families in your community to help them understand how to access these funds
      
3. Stay tuned—we will update the field as soon as Treasury releases draft regulations and clarifies eligible afterschool program definitions.