In June, I attended a meeting with representatives of the U.S. Treasury to learn more about a new source of federal funding that could benefit 90% of American students. Starting in the 2027 tax year, the Education Freedom Tax Credit will allow taxpayers to claim a federal income tax credit up to $1,700 per year for contributions to nonprofit scholarship-granting organizations.
A recent study by the Department of Education predicted these donations could total $24 billion annually.
We recognize the tremendous opportunity the Education Freedom Tax Credit offers to millions of students. However, there are important caveats school leaders should know.
While every taxpayer in every state can contribute, only states that opt in to the program will have students receive scholarships. So far, 30 states have opted in, with New York’s governor committing to do so.
Furthermore, the money won’t go directly to schools but must be donated to and disbursed by the scholarship-granting organizations. Individual families must apply, and only students who are eligible to attend a public school in their state and whose household income is 300% or less than their area’s gross median income can receive these scholarships.
Even so, this program has the potential to provide educational support for nine out of 10 American students regardless of whether they attend a public, private, or charter school.
Scope of the Education Freedom Tax Credit
Final guidance is expected in September, but current guidance suggests that these areas are covered:
- Tuition and fees at private or religious K–12 schools;
- Academic tutoring for students attending a public, private, or charter school (including high‑dosage, additive academic tutoring);
- Support services for students with disabilities or special needs, consistent with Section 530 guidance, attending a public or charter school; and
- After‑school enrichment programs tied to the student’s K‑12 schooling, at a public, private, or charter school.
The allocation of funding will also depend on each scholarship-granting organization’s mission.
With a range of stakeholders to connect and regulations to consider, the time to plan for compliance and accountability is now. District leaders first actions should be to determine whether their state has opted in.
Find the current list on the Internal Revenue Service website. If your state has opted in, here are three steps to prepare your district and your students:
1. Get listed as an approved education provider with scholarship-granting organizations.
Scholarship-granting organizations will handle the administrative tasks of receiving contributions and distributing scholarships to students, so study their options and find those whose missions align with supporting public school students in your community. Work with them to register as one of their Approved Education Providers.
Schools or districts can also form their own scholarship-granting organizations. Doing so requires dedicated resources, but the opportunities presented by the tax credit program are a powerful pitch when recruiting local leaders and advocates: The money is there, and they have the opportunity to direct it to the students who will benefit the most.
2. Add the Education Freedom Tax Credit to your funding strategy.
This program has too many moving parts for just one person to manage. Fortunately, most schools already have the resources among existing contacts and volunteer lists, so form a team to monitor the latest developments.
Ideally, your team will include someone with finance knowledge and someone with roots in the community who understands the resources that might qualify for funding. Other valuable skill sets include marketing, community relations, or working with nonprofits.
Board members of your parent-teacher association, booster clubs, community service clubs, and the local chambers of commerce may be ideal candidates, as their businesses might also be service providers.
One mission of the team should be to educate families about how to search for providers and how to apply for scholarships. Another should be to consider the feasibility of forming a Scholarship Granting Organization to receive and disburse funds.
3. Inform families about the Education Freedom Tax Credit.
District leaders can affect the contributions flowing into the scholarship-granting organizations in support of their students. Community outreach should clarify how families can apply for scholarships.
Because the success of the program depends on taxpayer contributions, the other mission can be to encourage contributions to the organizations that provide scholarships to students attending your schools.
The sooner your school or district takes these steps, the better prepared your students will be when the Education Freedom Tax Credit dollars start flowing, and the more your students can benefit.
