How public school foundations can prepare to expand educational opportunities through a new federal tax credit program.
Public school foundations will soon be able to unlock a new source of funding for tutoring, educational technology, and other after-school enrichment needs.
Beginning Jan. 1, 2027, the Federal Scholarship Tax Credit (FSTC) will establish an opportunity to support K-12 educational expenses through tax-advantaged private donations. While much of the attention has focused on private school scholarships, eligible public school students can benefit, too.
Public school foundations should explore the opportunity. But to take advantage of it, foundations must consider eligibility criteria, scholarship administration, financial oversight, and federal compliance requirements.
According to the Treasury’s proposed regulations, students eligible to enroll in public school qualify, and scholarships can cover qualified expenses beyond tuition. A public school foundation in a participating state that meets the federal requirements can become a Scholarship Granting Organization (SGO) and direct donor-backed credit dollars to programs that district budgets rarely reach.
What Does the Federal Scholarship Tax Credit Mean for Public Schools?
Established under Internal Revenue Code Section 25F, the FSTC allows individual taxpayers to claim a dollar-for-dollar federal income tax credit for qualified cash contributions to approved SGOs.
SGOs are eligible 501(c)(3) public charities that receive donations and award scholarships to qualifying K-12 students. The program includes several important provisions:
- Tax incentives for donors: Donors may receive a dollar-for-dollar tax credit of up to $1,700 for individual filers or $3,400 for joint filers, with any unused credit amounts carrying forward for up to five years (IRC § 25F).
- Broad student eligibility: Students must meet household income requirements, generally no more than 300% of area median gross income, adjusted for family size, and be eligible to enroll in a public elementary or secondary school.
- Funding for qualified educational expenses: Aligned with IRC § 530(b)(3)(A) to cover tutoring, technology, educational resources, after-school enrichment, and special-needs services.
For public school foundations, this could open new avenues to help students access educational resources that families or district budgets may struggle to support.
Foundations looking to scale tutoring programs, expand access to learning technology, or assist families with special education costs can leverage these funds to meet those critical needs. Importantly, scholarship funds are intended for eligible students and qualified educational expenses, not unrestricted district spending.
Can Your Public School Foundation Participate?
A public school foundation may be eligible to become an SGO. Under federal law and Treasury’s proposed regulations, SGOs must meet several requirements, including:
- Nonprofit status: Qualify as a tax-exempt 501(c)(3) public charity rather than a private foundation.
- Scholarship reach: Award scholarships to at least 10 students who do not all attend the same school.
- Financial accountability: Maintain separate accounts for qualified contributions, meet scholarship spending requirements, and comply with applicable auditing and reporting obligations.
- Student eligibility: Verify household income and other eligibility criteria, verify scholarship funds support qualified expenses, and comply with required scholarship award priorities.
- State participation: Operate in a state that has opted into the program and be included on its approved SGO list.
One particularly important consideration is the requirement that SGOs spend at least 90% of their income on scholarships. Treasury’s proposed regulations offer a potential safe harbor for certain organizations whose activities are at least 85% scholarship-related, allowing the 90% spending test to be applied to a segregated FSTC account.
That distinction matters for traditional public school foundations that support a mix of classroom grants, student scholarships, and other district initiatives. Some foundations may need to evaluate whether their existing structure works or whether a separate scholarship-focused organization would be more appropriate.
Because portions of the federal guidance remain proposed, foundations should consult qualified legal and tax advisers before making structural or operational decisions.
Five Steps Public School Foundations Can Take Now
The FSTC launches in 2027, but foundations don’t need to wait to begin exploring the opportunity. Early planning can help determine whether participation makes sense and what infrastructure will be required.
- Confirm your state’s participation.
States must voluntarily opt into the FSTC and submit lists of eligible SGOs to the IRS. Start by checking the IRS participating-states page and identifying the state agency responsible for the process. Confirm applicable application requirements and deadlines. - Evaluate your foundation’s eligibility.
Review your nonprofit structure, existing activities, and financial processes against federal SGO requirements. Pay particular attention to scholarship spending thresholds, student eligibility verification, and the ability to support students attending more than one school. - Identify the greatest opportunities for student impact.
Consider where scholarship funding could make a meaningful difference. That might include academic tutoring, educational supplies, technology, or qualifying services for students with disabilities. Defining these priorities early can help inform scholarship planning and community outreach. - Implement a donor engagement strategy.
The FSTC establishes a potential incentive for individual donors to support local students. Foundations can explore outreach to families, alumni, community members, and local employers.
Although businesses cannot directly claim the Section 25F credit, employers can encourage their employees to make qualifying personal contributions. This may offer a compelling connection between community investment, student success, and long-term workforce development. - Establish the infrastructure to manage scholarships responsibly.
Operating an SGO program involves more than collecting donations and awarding funds. Foundations need reliable processes for applications, eligibility verification, scholarship allocations, expense management, and reporting.
Establishing those processes before fundraising begins can help prevent administrative bottlenecks and reduce compliance risks as participation grows.
How Can Foundations Manage the FSTC Without Overwhelming Their Business Office?
For many public school foundations, fundraising and community relationships are familiar territory. Managing individual scholarships, verifying eligibility, approving qualified expenses, and maintaining detailed financial records may present a different challenge.
That’s where ClassWallet can help.
For more than 12 years, ClassWallet has supported education savings account, scholarship, and teacher stipend programs across 38 states, helping programs distribute more than $7 billion to 1.3 million families. That experience provides a foundation for helping SGOs navigate the operational demands of the FSTC.
ClassWallet’s fund management technology supports three essential priorities:
- Reducing administrative burden: Connected donation, application, and digital wallet capabilities help streamline scholarship administration, supporting the reporting and distribution of funds and reducing reliance on manual processes.
- Strengthening financial oversight: Approved-vendor controls, transaction monitoring, and manual review of flagged activity help organizations manage spending and maintain documentation.
- Approved vendor network: Where an SGO permits retail purchases, families can shop at nearly 300 approved vendors, online, at retail prices, with no markup.
ClassWallet’s three-tier compliance architecture combines vendor curation, anomalous activity detection, and human review through its Validation Services team. These controls can support an SGO’s compliance processes, while the organization remains responsible for meeting its legal obligations.
For foundations operating with lean teams and limited administrative resources, having the right infrastructure in place can make a significant difference.
Preparing for 2027 Starts Now
The Federal Scholarship Tax Credit could give public school foundations a new way to expand educational opportunities for students and engage community donors.
But participation requires thoughtful preparation. Foundations must understand their eligibility, assess student needs, establish fundraising strategies, and establish the operational processes necessary to operate scholarships responsibly.
Those that begin evaluating their options now will be more appropriately positioned to determine whether and how to participate when the program launches in 2027.
Explore how ClassWallet can help your foundation prepare to run an FSTC scholarship program.