What is the New Federal Scholarship Tax Credit?

A new federal program will raise money for scholarships to eligible K–12 students. But this new first-of-its-kind scholarship has also raised many questions: What is it? What is it called? Who qualifies? Where does the money come from?

Let’s try to answer those questions.

A Scholarship by Any Other Name…

So far, this program has earned several names.

The program’s origins begin with a bill called the Educational Choice for Children Act (ECCA). Federal lawmakers incorporated the ECCA into the federal government’s most recently adopted omnibus bill, better known as the “One Big, Beautiful Bill” (OBBB). The OBBB passed the scholarship program into law on July 4, 2025.

Since then, lawmakers and pundits have used different names when discussing the program: the ECCA, the Education Freedom Tax Credit, and the Federal Scholarship Tax Credit (FSTC). (For the purposes of consistency, this post will refer to it as the latter.)

Whatever you call it, the goal of the program is simple: empower families with more options and resources so they can find a school that works best for their kids.

What Does the FSTC Do?

Federal policymakers have yet to finish the official guidance for the FSTC, but we can glean some high-level details from the signed bill.

The FSTC program enables individuals to make dollar-for-dollar tax-deductible donations of up to $1,700 to scholarship-granting organizations (SGOs). In turn, these SGOs will provide scholarships to K–12 students who may use the funds to pay for qualified education-related expenses, such as tuition, fees, tutoring, books, school supplies, special education expenses, etc.

These SGOs must (1) operate as 501(c)(3) nonprofit organizations, (2) obtain state certification, and (3) spend at least 90 percent of their revenue on scholarships.

If this program sounds familiar, there’s a reason for that. While drafting the legislative language, federal lawmakers modeled the new program after Pennsylvania’s tax-credit scholarship programs: the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC). Thanks to EITC and OSTC, Pennsylvania already has a robust network of SGOs prepared to accept FSTC donations.

Like EITC and OSTC, the FSTC will provide low- and middle-income families the resources they need to afford educational alternatives and support.

What the FSTC Doesn’t Do

Unfortunately, misinformation about the new program is abundant. Critics have berated the program with bad-faith critiques, so it is of the utmost importance to dispel some myths:

• It is not a “voucher program.” School vouchers entail direct government payments to non-public schools to cover the tuition and fees for students transferring out of their district public schools. This program is funded via private donations to the SGO of choice.
• It neither “defunds public schools” nor “uses public money.” The FSTC doesn’t take a single dollar from public schools, doesn’t affect public school funding at all, and doesn’t cost the state anything to opt in.  
• It isn’t just for wealthy kids already attending private schools. All families earning up to 300 percent of the area median income can qualify for the scholarship, which covers more than 90 percent of Pennsylvania families. Public school students can also qualify and get funding for tutoring, afterschool programs, and special needs services!
• States opting out don’t prevent donors from claiming the tax credit. Donors can still benefit from the tax credit by contributing to SGOs in states that have opted in. 

What’s Next?

Before students can benefit from the program, individual states must opt in. A state can opt in with either an order signed by its governor or a law passed by the state legislature. Either way, the governor must submit a list of qualifying SGOs to the federal government to officially participate in the program.

Currently, 28 states—mostly Republican-leaning states—have either officially opted in or indicated their intention to do so.

But it isn’t just red states opting in. Colorado Gov. Jared Polis, a Democrat, agreed to participate in the program, calling his decision a “no-brainer.” North Carolina Gov. Josh Stein, another Democrat, vetoed a bill to opt in but expressed his intent to opt in “once the federal government issues sound guidance.”

Gov. Josh Shapiro has not publicly indicated his intent to opt in—and it will be a costly mistake if he doesn’t. An analysis by Education Reform Now found that, if 15 percent of tax filers donated, Pennsylvania would receive about $483 million in scholarships—about the same amount provided by EITC and OSTC.

Failing to opt in to the FSTC will leave millions of dollars on the table for the hundreds of thousands of Pennsylvania kids in need of educational alternatives.

To learn more about the FSTC, click here for a more thorough analysis.