Treasury Regulations for the Federal Scholarship Tax Credit Fail To Protect Students

The One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump in July 2025, made drastic cuts to assistance programs and cut taxes for the rich. The OBBBA also created a less-known program—the Federal Scholarship Tax Credit (FSTC), a federal voucher program that will harm public school students and benefit the wealthy. Beginning in 2027, the FSTC will allow individuals to claim a dollar-for-dollar federal tax credit, up to $1,700, for their donations to scholarship-granting organizations (SGOs), which keep up to 10 percent of the donation and distribute 90 percent through educational “scholarships”—also commonly known as vouchers—to K-12 students. Families earning up to 300 percent of their area median gross income are eligible to receive a voucher, making the program nearly universal with an estimated 96 percent of children in participating states eligible. This tax credit ultimately works as a loophole for the federal government to subsidize private education using public taxpayer dollars, creating the first-ever national voucher program.

The OBBBA requires states to opt in annually if they wish to participate in the program. As of September 14, 30 states have formally opted in, while others have announced they are awaiting official guidance from the U.S. Department of the Treasury on how the program will be regulated. As governors and state legislators review the newly released temporary and proposed rules, it is imperative to understand how these regulations fail to reduce the risks this program creates—risks that threaten equal access to a high-quality education for all students by undermining civil rights protections; opening doors for waste, fraud, and abuse; and directing funds to the wealthy over public school students most in need.

FSTC regulations fail to provide adequate protections for students

While the OBBBA’s tax credit scholarship program allows eligible students to use funds awarded to them for qualified elementary or secondary school expenses, which may include services that can support public school students, the temporary regulations (in effect through October 1, 2029) fail to adequately protect students or give governors the authority to ensure the benefits will outweigh the harm. Instead of promoting a high-quality education for all, these regulations allow SGOs to pick and choose the students they serve and lack accountability measures to ensure the quality of educational services taxpayer dollars are funding, all while disproportionately benefiting the wealthy.

Authority is given to scholarship-granting organizations, not states

Under the temporary and proposed regulations, states cannot enforce additional requirements for SGOs that go beyond the minimal requirements defined in the OBBBA, restricting state authority over how SGOs operate in their jurisdiction or the power to ensure SGOs serve all students. For example, states will not be able to restrict SGOs that discriminate based on disability, religion, sexual orientation, or gender identity, nor will they be able to require SGOs to provide vouchers to public school students.

Rather, authority over which students receive vouchers and the value of those vouchers is left solely in the hands of individual SGOs. In fact, the temporary regulations state that the administration assumes SGOs will make public their mission and “the scope of their scholarships for eligible students,” implying that SGOs will freely decide whom they serve. Federal requirements only demand that SGOs restrict vouchers to families earning up to three times their area median gross income, give at least 10 students in at least two different schools vouchers, prioritize students who received a voucher the previous school year and siblings of students who received a voucher, and not earmark funds for individual students.

According to EFTC Credit, an online platform built to support federal tax credit scholarship donors, families, and SGOs, there are 531 operating SGOs across the country, nearly one-quarter of which have a religious focus, while those with a listed focus on nonsectarian, public school, or disabled students each make up less than 2 percent. Given the current landscape of SGOs in the United States and data on recipients of current state voucher programs, it is evident that SGOs prioritize certain student groups and have no reason to do otherwise under the FSTC. While states may wish to direct funding through the FSTC to public school students, SGOs ultimately hold the authority to decide where funds are directed, and governors are given no real power to enforce civil rights protections, support public school uses, or tailor the program to support their state’s unique needs.

Adequate preventions for fraud and abuse, as well as meaningful accountability measures, are missing

Similarly, since the regulations do not give states authority to set additional requirements for SGOs operating within their state—outside of general state requirements for all charitable organizations—states are also limited in their ability to conduct oversight, hold SGOs accountable, and control for quality of services. Instead, the state role is reduced to a rubber stamp by simply confirming which SGOs in their state meet the minimal federal requirements.

While the temporary regulations require SGOs to submit an “annual financial and programmatic audit report” to the states they operate in, the federal government sets the requirements for the audit, and it does not give states the power to require additional reporting or remove SGOs from operating within their state unless they fail to meet the limited federal requirements. If the state were to find, for example, that an SGO is disproportionately providing vouchers to only certain student groups or allowing vouchers to be spent at fraudulent or low-performing schools and providers, the state would not have grounds to close the SGO or enforce any other SGO accountability measures. This also applies to national and multistate SGOs, which have no meaningful connection to local communities or their educational needs, yet are advantaged under the regulations. This may open opportunities for fraudulent companies to target voucher recipients and sell services that are not high quality or as advertised, creating new challenges for states to navigate as they are unable to conduct quality control. 

Money will be disproportionately directed to the wealthy rather than the public schools most in need and their students

While there are efforts to create SGOs that direct funds to public school students in states that have already opted in, states that have not yet made a decision should consider whether the potential of directing a small portion of the funds to public schools is worth the high risk of this program.

The design of the FSTC allows wealthier communities, which have individuals who have the disposable income to make donations and the federal income tax liability to claim the tax credit, to generate more funds than low-income communities whose residents may not earn enough to qualify for a tax credit. In fact, analysis from Brookings found that the wealthiest counties will generate three times the amount of FSTC money per pupil as the poorest counties—rural counties will also see less money. In addition to this, long-standing SGOs, which predominantly focus on private school vouchers, have the infrastructure and funding to market to donors and bring in more donations. Meanwhile, new SGOs focused on supporting the public schools most in need will struggle to compete for donations. Without any state authority over SGOs and the distribution of funds, states will be limited in their ability to prevent this type of regressive funding if they opt in.

Additionally, donations cannot go directly to a public school’s general fund. Vouchers must be spent on specific educational expenses, which the U.S. Treasury Department has yet to clarify, but public schools typically do not charge for tuition or most educational services. To ensure access to a universal education, many states, such as California, have rules around permissible fees for public school students, meaning public schools could be disadvantaged compared with private schools and providers. Even more so, when students leave public schools to attend a private school with a voucher, the public school loses significant amounts of money, harming the students who remain. For example, modeling suggests a 5 percent decline in enrollment in Cleveland Metropolitan School District could produce an estimated loss of $12 million to $31 million. 

Conclusion

Allowing some public schools to earn pennies from a program designed to benefit private schools does not make the FSTC a reasonable program for states to enroll in to meaningfully support public schools. The temporary regulations, which will guide the 2027 implementation, make it clear that governors will not have the authority to create additional requirements that ensure civil rights protections; promote a high-quality education; or prevent waste, fraud, and abuse. Instead, the FSTC will benefit the wealthy by directing public funds predominantly to private schools while creating a regressive funding stream for public education. State leaders should refrain from opting in, and federal legislators should move forward with repealing the FSTC by advancing legislation such as the Keep Public Funds in Public Schools Act. Together, federal, state, and local leaders should focus their efforts on impactful evidence-based solutions that strengthen educational outcomes for all students.

The author would like to thank Weadé James and Alex Cogan of the Center for American Progress for their valuable contributions to this column and Jocelyn Moreno for her thorough fact-checking.