Authored by Curt Merlau and Lindsay Bull

Part 1 of a 3-Part Series on Federal Scholarship Tax Credit (FSTC)

The Federal Scholarship Tax Credit (FSTC), established under Internal Revenue Code §25F through the Educational Choice for Children Act, creates a new federal mechanism for funding K–12 educational services beginning January 1, 2027. Under the program, eligible taxpayers may receive a federal tax credit for qualified contributions to approved Scholarship Granting Organizations (SGOs), which then award scholarships to eligible students for qualified educational expenses. The program is national in scope but operates only in states that elect to participate and certify SGOs.

Public school districts may be among the largest and most scalable providers of many eligible services funded through the program including tutoring, transportation, special education supports, extended learning opportunities, and educational technology. For district leaders facing persistent fiscal pressures, FSTC presents an opportunity to supplement traditional funding streams while expanding access to services for students and families.

Why does the FSTC matter for district funding and student access?

The FSTC creates a permanent federal funding pathway that redirects private taxpayer contributions toward scholarships for eligible students from households earning up to 300% of area median income. To participate, states must annually elect to the program and certify qualified SGOs. SGOs must comply with federal requirements, including maintaining segregated accounts, spending at least 90% of income on scholarships, verifying student eligibility, and prohibiting donor earmarking.

For public school districts, the policy creates both opportunity and urgency. Districts that proactively position themselves as scholarship-supported service providers may gain access to a new revenue stream supporting programs they already operate. Districts that wait until implementation is fully underway may find themselves competing for partnerships, donor engagement, and scholarship recipients after local ecosystems have already formed. The opportunity is particularly significant in rural and underserved communities where public schools may be the most accessible providers of educational services funded through scholarships.

Who needs to be involved as districts prepare for FSTC?

• District Leadership: Establish strategic priorities, determine participation models, and align FSTC opportunities with district goals and community needs.
• Finance and Compliance Teams: Develop processes for scholarship-funded service delivery, financial tracking, reporting, and audit readiness.
• Scholarship Granting Organizations and Community Partners: Manage scholarship administration, donor engagement, eligibility verification, and compliance with federal requirements.

Without alignment across these roles, districts risk missing revenue opportunities, creating compliance vulnerabilities, and limiting student access to scholarship-supported services.

How can districts turn existing services into scholarship-funded student service bundles?

Rather than viewing the Federal Scholarship Tax Credit as a standalone funding program, districts should treat it as a mechanism for expanding access to educational services they already provide. The greatest opportunity may not be creating entirely new offerings, but packaging existing services such as tutoring, career-connected learning experiences, after-school programs, specialized STEM pathways, and student support services in ways that align with scholarship-funded expenses.

One emerging model is the “student services bundle” approach. In this model, districts work with Scholarship Granting Organizations (SGOs) to make a defined package of services available to eligible students. Examples could include high-dosage tutoring, summer learning, transportation for career exploration activities, industry credential programs, work-based learning experiences, dual enrollment supports, assistive technology, and extended-day enrichment programs. Rather than creating a new bureaucracy, districts leverage scholarship dollars to expand participation in programs they already operate.

Career-connected learning may be one of the strongest alignment opportunities for FSTC because many districts already operate the underlying infrastructure. CTE programs, work-based learning, apprenticeships, career exploration activities, transportation to employer sites, credential preparation, academic tutoring tied to pathways, and transition supports are all services districts are increasingly being asked to scale regardless of FSTC. The scholarship program can create an additional funding pathway for eligible students to access those services, helping districts expand employer partnerships while reducing pressure on general operating funds. This aligns closely with PCG’s broader Access & Funding vision of supporting student-centered funding models that follow services and outcomes rather than institutional silos.

What risks do districts face if they wait to plan?

• Lost Funding Opportunities: Districts that fail to establish SGO relationships early may lose access to scholarship-funded demand that is captured by other providers.
• Compliance and Operational Risk: Inadequate planning may lead to weak documentation, unclear eligibility processes, or misalignment with federal requirements governing scholarships and SGOs.
• Fragmented Student Experience: Without a district-led strategy, families may access disconnected services from multiple providers rather than through coordinated support systems aligned to district goals.

By building partnerships now, districts can position themselves to improve student outcomes, strengthen community engagement, and unlock sustainable funding for educational services.

What steps can districts take now to prepare?

1. Assess Your District’s Service Portfolio: Identify existing services that align with FSTC-qualified educational expenses, such as tutoring, transportation, educational technology, special education supports, and after-school programming. Many districts already offer services that may be scholarship eligible.
2. Track State Participation and Federal Guidance: Monitor your state’s FSTC implementation activity and review official guidance from the IRS regarding §25F requirements and participating states. Visit the IRS FSTC information page.
3. Engage Potential SGO Partners: Begin conversations with community foundations, education nonprofits, and district foundations about SGO participation models, governance structures, and implementation readiness. Early collaboration will be important because states must certify SGOs for participation.
4. Develop an FSTC Readiness Roadmap: Establish an internal planning team to evaluate revenue potential, compliance requirements, operational workflows, eligibility verification processes, and donor engagement strategies before program launch.

How PCG Helps Districts Prepare for FSTC?

PCG can help districts assess readiness, identify eligible service opportunities, evaluate partnership models, and develop an implementation strategy that aligns with state requirements, student needs, and district goals.

By planning now, districts can position themselves to expand access to student services, strengthen community partnerships, and make the most of a new federal funding opportunity.

Visit our Educational Access and Funding services page.

About the Authors