FSTC Reality Check, Part 2 of 3

SchoolRight

Sep 12

5 min read

Updated: Oct 7

Eligibility Doesn't Mean Funded—What the $1700 Credit Really Does and Doesn't Mean

New or materially revised wording is shown in red.

One of the easiest assumptions to make about the Federal Scholarship Tax Credit is also one of the most important for schools to correct early.

A family can be eligible for FSTC assistance without being guaranteed a scholarship.

The $1,700 figure getting so much attention applies to the taxpayer making the contribution, not to the student receiving scholarship assistance.

Beginning in 2027, a qualifying taxpayer may receive a federal tax credit of up to $1,700 for cash contributed to an approved Scholarship Granting Organization, or SGO. For a married couple filing jointly, the proposed regulations provide for a combined potential credit of up to $3,400 when each spouse makes qualifying contributions.

That SGO then uses qualifying contributions to provide scholarships to eligible K–12 students.

So the credit helps create scholarship funds. It does not promise every eligible student $1,700. And it does not guarantee that every eligible student will receive the same amount—or any particular amount at all.

That point is even more significant in light of the proposed Treasury and IRS regulations released in October 2026. Treasury estimates that approximately 96% of children in participating states could satisfy the federal student-eligibility requirements. In other words, the potential pool of eligible students may be extremely broad, while the amount of scholarship funding available will still depend upon how much taxpayers actually contribute to SGOs.

What Actually Determines Whether a Family Receives Money?

Federal law establishes who may qualify and places requirements on SGOs, but it does not currently create one national scholarship formula that every SGO must use.

The proposed regulations reinforce that point. Although federal law establishes an upper eligibility limit tied to 300% of area median gross income, an SGO would not necessarily have to award scholarships to every student who falls beneath that ceiling. An organization could choose to concentrate its scholarships on families at lower income levels or otherwise establish award policies within the federal framework.

That means award amounts may depend on factors such as the amount of money an SGO has available, the number of eligible applicants it is serving, its own award practices, and any additional requirements that may be imposed by the state or final federal rules.

That could create very different outcomes for families.

Two families at the same school might have similar income, similar household size, and similar financial need. If they apply through different SGOs, or one SGO has substantially more resources than another, their scholarship awards could look very different.

Even two families who both meet the federal eligibility requirements could therefore have very different chances of receiving an award.

That is not necessarily a flaw in the program, but it is something schools should be thinking about now.

Should a School Work With One SGO or Several?

There is not yet one obvious answer. Working with multiple SGOs may give families more opportunities to receive assistance. Working primarily with one SGO may create more consistency in applications, communication, deadlines, and award practices.

The right approach may depend on the state, the SGOs available, and how each school wants outside scholarships to interact with its own financial-aid program.

Schools should probably be asking prospective SGOs questions such as:

How are award amounts determined?
What happens when requests exceed available funds?
Will the SGO use an income threshold below the federal maximum?
How are returning students handled?
How predictable are awards from year to year?
How are duplicate awards prevented?
How will the SGO communicate with the school?

Those questions may matter just as much as whether the SGO is approved.

Can a School Be the SGO?

Potentially, but not simply because it is already a 501(c)(3) nonprofit organization.

An SGO must meet federal requirements and be included on the participating state's approved list. It also must provide scholarships to at least 10 students who do not all attend the same school.

That means a school could not simply create an SGO to collect FSTC contributions and then send all of the scholarship money back to its own students.

A school-affiliated organization might qualify if it is properly structured, serves students across multiple schools, meets all federal requirements, and receives the necessary state approval.

The proposed regulations also add important operational considerations. SGOs must satisfy federal scholarship-spending requirements and maintain appropriate treatment of Section 25F funds. For a typical operating school whose primary activities include instruction, staffing, facilities, athletics, administration, and other school functions, meeting the requirements of an SGO may be considerably more complicated than simply establishing a scholarship fund.

For most schools, however, the more practical model will likely be to work with one or more independent or regional SGOs.

What Happens When SGO Money and School Aid Overlap?

This may become one of the most important policy questions schools need to answer.

Suppose a school determines that a family needs $8,000 in assistance and awards $8,000 in institutional aid.

Later, that family receives a $3,000 FSTC-supported scholarship through an SGO. Does the school's aid decrease to $5,000? Does the family receive both amounts? What happens if another family with nearly identical finances receives no outside scholarship at all?

There may be several reasonable approaches, but schools should decide their approach before those situations begin showing up. Otherwise, outside scholarships may unintentionally create very different outcomes among families whose financial circumstances are otherwise similar.

This issue may become more common than schools initially expect if federal eligibility ultimately reaches such a large percentage of families. Broad federal eligibility does not necessarily mean that every qualifying family has demonstrated financial need according to a school's own financial-aid methodology.

The Main Point

FSTC may become a very valuable resource for private-school families. But schools should keep four ideas separate:

Eligibility does not guarantee an award.
An award does not guarantee the same amount for every family.
Federal eligibility does not necessarily mean a family has demonstrated financial need according to the school's own financial-aid criteria.
The $1,700 credit belongs to the donor, not the student.

That is the part schools will need to communicate clearly. Once families begin hearing “$1,700 tax credit” and “scholarships,” it will be very easy for those ideas to blur together.

And with Treasury estimating that roughly 96% of children in participating states may satisfy the eligibility requirements, separating eligibility from actual scholarship availability becomes even more important.

The better schools understand how the money may actually work, the better prepared they will be to manage expectations and fit FSTC into an existing financial-aid philosophy.

Next in the FSTC Reality Check series: Part 3: Before the Money Arrives — The Financial-Aid Decisions Schools Need to Make Now

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Sources: This article is based on current federal law and guidance regarding Section 25F and the Federal Scholarship Tax Credit, including IRS Notice 2025-70; current IRS Federal Scholarship Tax Credit guidance; the Treasury and IRS proposed Section 25F regulations released in October 2026; and related federal implementation guidance.

Note: Some implementation details remain subject to the federal rulemaking process. This article reflects the federal framework and guidance available as of October 2026.