Insights from Zach Davidson, Director, Solutions Engineering, ClassWallet
The Federal Scholarship Tax Credit (FSTC) is not a zero-sum game. It is a chance to serve kids wherever they learn, whether they attend public school, attend private school, or learn at home. For Scholarship Granting Organizations (SGOs), the question is not whether demand will come. It is whether their operations will be ready when it arrives. The good news is that readiness is something an SGO can build now.
What is the Federal Scholarship Tax Credit?
The FSTC is a federal tax credit that Congress enacted in 2025 as part of the One Big Beautiful Bill Act. Beginning January 1, 2027, it allows individual taxpayers to claim a credit of up to $1,700 for donations to SGOs in states that choose to participate. Under the proposed regulations, married couples filing jointly may claim a combined credit of up to $3,400. An SGO is a nonprofit organization that receives those donations and awards them as scholarships to eligible K-12 students. To qualify, an SGO must meet federal requirements and be included on its state’s list of participating organizations. At its core, the FSTC is about meeting students where they are.
Source: IRS news release IR-2026-117 (October 1, 2026) and the Treasury and IRS proposed regulations (REG-117199-25)
What will change for SGOs when the FSTC begins?
SGOs should expect more donors, more scholarship applications, and more reporting, all arriving at once. That is good news for students. Every new donation can open a door for a child. For one student, that door may be tuition. For another, it may be one of the expected qualifying expenses, such as tutoring, special-needs services, instructional materials, technology, or enrichment outside the school day.
It also multiplies the work behind each scholarship. A single gift sets off donor acknowledgment, reconciliation, awarding, disbursement, and reporting requirements. At FSTC volume, that administrative load can outpace many teams’ capacity to hire.
Why is handling FSTC volume an infrastructure challenge, not a fundraising challenge?
The hardest part of handling FSTC volume begins after the donation arrives. That pressure looks different for every SGO, depending on the systems already in place. Each starting point has a practical way forward.
What if an SGO already runs a fundraising platform?
For these organizations, the FSTC is a scale challenge problem. Donor relationship management tools are typically designed for cultivation and outreach. Reconciliation, multi-program compliance reporting, and fund distribution handoffs at FSTC volume may sit outside that design.
What if an SGO still runs on spreadsheets?
For these organizations, the FSTC is a timing challenge more than a scale challenge. January 1, 2027 is a fixed date, and the time to prepare is now. Every hour moved off spreadsheet reconciliation is an hour returned to the families the SGO exists to serve.
In both cases, the challenge is the same. When donor management, awarding, disbursement, and reporting sit in separate systems, gaps can appear where volume is highest and where compliance and audit requirements are strictest.
What does SGO infrastructure for the FSTC look like?
SGOs need fundraising, awarding, disbursement, and reporting to run as one connected process, not as separate systems stitched together. Call it an “infrastructure of integrity”: compliance built into how the program runs every day, not reconstructed at year end.
Families and donors feel the impact, too. When administrative systems run smoothly behind the scenes, donors see their contributions transformed into real opportunity, while parents can focus on their child’s learning rather than navigating paperwork.
How can an SGO assess its FSTC readiness today?
Start with five questions. Any “no” marks a gap to close before January 1, 2027.
- Can your donation intake handle a sharp increase in individual gifts?
- Can you issue donor acknowledgements, including unique donor numbers, and report contribution information?
- Can you keep FSTC contributions separate from other funds and report on them separately from any state program you manage?
- Do awarding and disbursement connect directly to your fundraising records?
- Can you produce an audit trail from application through reporting?
How does ClassWallet support SGOs preparing for the FSTC?
For more than 12 years, ClassWallet, a fund management platform, has supported education savings account, grant, and scholarship programs across 38 states, distributing more than $7 billion to 1.3 million families and participants.
For SGOs, ClassWallet’s donation portal, application portal, and digital wallet for fund distribution connect fundraising, awarding, disbursement, and reporting on one platform. Each component also works on its own for SGOs that already have systems in place.
ClassWallet’s three-tier compliance architecture is designed to identify anomalous transactions before they are processed: vendor curation, anomalous activity detection and validation services manual review. That is an infrastructure of integrity, from application through reporting. Read more in the white paper, Infrastructure of Integrity: How Scholarship Granting Organizations Can Scale FSTC without Scaling Risk.
The FSTC is about serving kids wherever they are. The SGOs that serve them well will be the ones whose infrastructure is ready before the first donation arrives.
Find out how ClassWallet can help your organization get FSTC-ready before January 1, 2027.