Written by Sr. Dale McDonald, PBVM, Ph.D., Vice President of Public Policy, NCEA, McDonald@ncea.org
In July 2025, Congress passed a new tax code provision: the Federal Scholarship Tax Credit (FSTC). This creates a permanent federal income tax credit designed to encourage private donations that support K–12 students through nonprofit scholarship granting organizations (SGOs). The U.S. Department of the Treasury will administer the program, not the U.S. Department of Education. It goes into effect in January 2027, but much work needs to be done to prepare for its implementation in our Catholic schools.
What is the FSTC?
The FSTC grants a tax credit for a donation to a SGO that is on a list of organizations that the state annually submits to the U.S. Treasury as eligible to participate. Individual taxpayers may donate up to $1,700 per year to a qualified SGO and receive a dollar-for-dollar federal income tax credit for that contribution. An individual taxpayer may donate to an approved SGO in any participating state, regardless of where the donor lives. Donors may not designate scholarships for specific students, though they may designate funds for a particular school.
State Participation is Optional
The FSTC operates on a voluntary state opt-in basis. By January 1 each year, a state that chooses to participate must submit to the Secretary of the Treasury a list of SGOs in the state that meet the designated requirements described in the statute.
What is the Role of the U.S. Treasury?
The U.S. Treasury is the primary federal authority governing how the FSTC will operate. It will make the rules and provide oversight and administration of the program. Treasury will maintain the official list of eligible SGOs and ensure compliance with federal tax law. Forthcoming guidance from Treasury is needed for states, SGOs, and donors to understand how this new tax credit will function. Many of the fine points of the operational aspects of the program and the role of the state that chooses to opt-in are ambiguous and need more clarification.
Treasury is now engaged in deciding the rules that will govern the operation of the program and will publish them and ask for public comments.
Who Can Receive a Scholarship?
Eligible scholarship recipients must come from families earning no more than 300 percent of the median gross income of the local region. Students must be “eligible” to enroll in a public or private elementary or secondary school, but the eligibility of homeschooled students remains unresolved until Treasury rules.
What are the Responsibilities of Scholarship Granting Organizations (SGO)?
To participate, an SGO must be a 501(c)(3) nonprofit organization and not a private foundation. It must appear on the state-submitted list approved by Treasury. SGOs expend scholarship funds only on qualified educational expenses outlined in Section 530(b) of the Internal Revenue Code. This includes tuition, fees, tutoring, curriculum materials, special needs services, transportation, and computer technology. At least 90 percent of income from qualified contributions must be used for scholarships, and those funds must not be co-mingled with other accounts. Scholarship awards must also give preference to prior-year recipients and siblings.
What’s Next?
Other more technical aspects of the FSTC are being discussed by tax attorneys. NCEA and other private school organizations are providing input to Treasury aimed at maximizing participation and minimizing damage from misinformation provided by opponents of the program. NCEA and other private school organizations are developing talking points and will provide information for our school communities and encourage them to give voice as well to the concerns that may need to be addressed for this program to be successful for enabling families to choose Catholic schools.
Meanwhile the Catholic school and parish communities need to begin planning for local level FSTC implementation. This will include creating SGOs and encouraging SGO donations, preparing schools/parishes to advocate for FSTC, creating parent awareness of SGOs, and preparing schools and families to accept FSTC students.
Learn More
Register for the NCEA webinar, Understanding the New Federal Scholarship Tax Credit, on February 17, 2026 at 2 PM ET. Sr. Dale McDonald, PBVM, Ph.D., will discuss what dioceses, schools, and parishes should be considering when preparing to create and support SGOs and implement the program in their schools.
