Federal Scholarship Tax Credit: The Questions Schools and SGOs Are Asking Right Now

Since the Federal Scholarship Tax Credit (FSTC) was enacted, conversations shifted quickly from understanding the legislation to planning for implementation.

The FSTC depends on coordination across an entire ecosystem. Donors, Scholarship Granting Organizations (SGOs), schools, dioceses, and community partners each play a role in helping families access scholarships.

SGOs often lead donor engagement and scholarship administration. Schools help families understand opportunities and navigate application processes. Dioceses and networks may coordinate communication across communities.

Building that shared understanding early can help ensure the program functions smoothly once scholarships begin flowing.

FACTS recently hosted two webinars that covered the FSTC basics and explored this ecosystem in more detail. In these conversations, leaders from across the country raised practical questions about how the program functions, how it interacts with existing scholarship programs, and what preparation should look like as federal guidance develops.

Let’s dive into six common questions that schools and SGOs are asking about the FSTC right now.

The FSTC program creates a federal income tax credit for individuals who donate to approved SGOs.

That distinction matters because a tax credit reduces a donor’s tax liability directly, unlike a charitable deduction that only reduces taxable income.

Another aspect of the program that often causes confusion is the $1,700 amount frequently referenced in discussions about the FSTC.

That figure applies to the tax credit available to donors, not the scholarship amount awarded to students. SGOs collect contributions from multiple donors and distribute those funds as scholarships, meaning the awards themselves may be significantly larger.

Under the current structure, individual donors may claim up to $1,700 per taxpayer per year for qualified contributions.

Many schools participating in state scholarship programs are naturally asking how the FSTC may interact with those existing initiatives.

In general, the programs can operate alongside one another. However, the law includes provisions intended to prevent donors from receiving multiple tax benefits for the same contribution.

If a donor receives a state tax credit for a donation, the federal credit may be reduced accordingly.

Additional guidance from the U.S. Treasury is expected to further clarify how federal and state credits interact in practice.

Community members located in states that aren’t initially participating in the program may wonder what the FSTC means for them.

Donors may contribute to an SGO located in another participating state. However, the law requires that those contributions support scholarships for students within the state where the SGO operates.

Because of this structure, state-level FSTC participation decisions will play an important role in determining where scholarships are available.

The FSTC relies on SGOs to administer scholarships locally.

Participating organizations must meet several requirements, including operating as a 501(c)(3) nonprofit, verifying family income for scholarship recipients, and distributing at least 90% of funds as scholarships.

In practice, SGOs serve as the operational backbone of the program. Their responsibilities often include:

• Managing donor contributions: SGOs receive and track donations from individuals or organizations participating in the tax credit program.
• Verifying student eligibility: SGOs review income documentation and confirm that students meet program guidelines.
• Awarding scholarships: SGOs determine scholarship amounts and coordinate with schools to ensure funds are applied to qualifying expenses.
• Maintaining compliance: SGOs must track donations, scholarship awards, and program outcomes to meet federal requirements.

Because SGOs operate at the intersection of donors, families, and schools, they often manage a high level of coordination. As conversations around the FSTC evolve, many organizations are beginning to evaluate the systems and processes needed to manage these responsibilities at scale.

Schools do not administer the tax credit, but they play an important role in how families access scholarships.

While SGOs manage donations and award scholarships, schools often serve as a key point of guidance for families navigating the process. Families frequently turn to school administrators, financial aid offices, or admissions teams to better understand available scholarship opportunities and how they can apply.

Schools may support families by:

• Sharing information about available scholarships. Schools can help families understand eligibility requirements, application timelines, and where to apply.
• Helping families navigate the application process. While schools do not approve scholarships, they may answer questions and direct families to the appropriate SGO resources.

Once scholarships are awarded, schools also coordinate with SGOs to ensure the correct application of funds. This may include:

• Aligning tuition billing schedules with scholarship disbursements
• Adjusting financial aid packages when scholarship funds are received
• Applying funds directly to a student’s tuition or qualifying expenses

The legislation establishes the program framework, but several operational details will be clarified through federal rulemaking and state participation decisions.

For now, focus on preparation rather than immediate operational changes. That preparation may include reviewing eligibility verification processes, strengthening donor and reporting systems, and monitoring developments as federal guidance emerges.

The FSTC introduces a new opportunity for families, donors, and SGOs. As federal rulemaking progresses and states consider participation, additional details about implementation will continue to emerge.

FACTS works with organizations navigating these questions and preparing for scholarship program administration. As guidance develops, we will continue sharing insights and resources to help schools and SGOs stay informed. Here are a few already available resources to explore:

• School Choice Resource Hub: A collection of program details, webinars, and insights to help schools and SGOs understand and prepare for evolving scholarship programs
• FSTC Preparation Guide: A resource that covers the basics of the FSTC and tips for strengthening school and SGO partnerships, building donor readiness, preparing internal systems, and more