Newly released Federal Scholarship Tax Credit regulations lack the clarity needed for afterschool

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On October 1, the Department of the Treasury and the IRS released long-awaited proposed regulations to implement the Federal Scholarship Tax Credit (FSTC), also known as the Education Freedom Tax Credit, or section 25F. Treasury and the IRS also issued companion temporary regulations allowing states and Scholarship Granting Organizations to launch the tax credit on Jan. 1, 2027. The proposed regulations include the temporary regulations language, plus more. While the regulations provide some clarity for the afterschool field, including allowing program providers to be paid directly from a Scholarship Granting Organization, Treasury has not yet clarified which afterschool programs will be eligible to offer scholarships. See more on that in our Executive Director’s statement on the newly proposed regulations.

Background

FSTC became law in July 2025 as part of HR1 and offers taxpayers a federal tax credit of up to $1,700 for individuals and $3,400 for joint filers for contributions made to a Scholarship Granting Organization (SGO). In states that opt into the program, SGOs provide scholarships to students for education-related services at private or public schools, including supports such as afterschool programming. The law is set to take effect for the 2027 tax year.

Currently, 30 states have made the initial election to participate in the program, and states electing to participate in 2027 must do so on or before January 1, 2027. The decision to participate is made by the Governor or legislature in each state. In participating states the FSTC could provide significant funding to expand afterschool and summer learning for low- and middle-income students. Treasury estimates that about 96% of children in participating states would be eligible. Based on the America After 3PM average weekly cost of afterschool, a single $1,700 contribution could cover a student's afterschool program for more than 12 weeks – a full season of enrichment, from robotics to writing and sports to the arts, for a child whose family couldn't otherwise afford it.

Details on new regulations

The two sets of rules released on October 1 serve different purposes. The temporary regulations set the procedures states and SGOs need now: state elections and SGO lists, SGO registration with the IRS, donor acknowledgments, and contribution reporting. They were issued without a comment period and will take effect on December 1, 2026, and will expire when the final comments take effect or no later than October 1, 2029.

The proposed regulations offer more comprehensive rules that will govern the program long term. Where the two overlap, the text is identical. The proposed rules add the substance: how the credit is calculated, how SGOs operate, how income is verified, how scholarships are paid, and annual audits. The regulations could change after public comment and likely will not be finalized until sometime in 2027. The 60-day comment period is open through December 1, and Treasury will hold a public hearing on the proposed rules on December 15, 2026.

Key concern: Eligible uses not clearly defined, including which types of afterschool and summer learning programs are included

For afterschool, the most important part of the regulations may be what they do not yet address. Scholarships can pay only for qualified elementary or secondary education expenses, defined by reference to section 530(b)(3)(A). That section includes supplementary items and services such as extended day programs. While that means afterschool programs are covered by the law, additional clarity is needed so SGOs can offer scholarships for afterschool programs in schools and communities that meet students' needs and interests. For example, will community-based programs be eligible in addition to those offered directly at a school? And are programs that operate year-round, including during summer months, eligible as well? While these questions are not addressed in the proposed regulations, Treasury calls guidance on permitted expenses "critical" and says it will be issued separately under section 530 as "a high priority," before the end of the year.

Without more clarity, SGOs hoping to connect families with school-based, community-based, for-profit, or faith-based afterschool and summer programs are left waiting, which means some SGOs may not be ready for the January 1 launch. In comment letters, the Afterschool Alliance has urged Treasury to adopt a broad definition of eligible programs. That would maximize choice for parents and be consistent with the legislative history, existing federal and state laws, and local practice across the nation. A narrow definition would shut out many parents who can't find programs that meet their needs on school sites.

What is addressed in the proposed regulations

While that lack of clarity remains an obstacle to the creation of SGOs focused on afterschool and summer programs, the proposed regulations do answer many other questions. In states that have opted into the FSTC, SGOs must be registered, programs must know about and connect with them, and SGOs must follow rules to protect program integrity. Most eligible afterschool providers will play a role as "vendors" that can be directly reimbursed by SGOs on behalf of families.

With about three months until launch, the regulations give SGOs important clarity. Most of these rules are proposed and could change after public comment. We are not tax attorneys; this is our best current reading, not an exhaustive list:

• Safe Harbor: SGOs must spend at least 90% of their income on scholarships, and normally "income" means all of an SGO's income from every source. But if at least 85% of a single-state SGO's activities are scholarship granting, it can apply the operating requirements, including the 90% rule, to just the FSTC contributions in its separate section 25F account. That leaves other funds available for operations. Multistate SGOs must also meet the 85% test, and they apply the 90% rule separately to the FSTC account they keep for each state.
   
• Taxpayer Donations: The $1,700 limit is per person, so a married couple filing jointly can claim up to $3,400 if each spouse gives $1,700.
   
• The 90% Rule Timeline: SGOs have until the end of the year after they receive income to meet the 90% requirement.
   
• Scholarship Timeline: SGOS can give scholarships the year after funds are received, so scholarships from 2027 donations might not occur until 2028.
   
• SGO Flexibilities: States can't add requirements beyond federal law, and must list every qualifying SGO located in the state that asks to be included. SGOs, however, can narrow their own focus, for example, to afterschool programs in remote areas, as long as the expenses qualify.
   
• Use of Vendors: SGOs can pay a verified provider directly, as long as the provider isn't related to the student and returns any overpayments. SGOs can also pay through qualified digital wallets.
   
• Newly Formed SGOs: Treasury estimates 600 to 700 SGOs will be created by 2030. States may list organizations whose tax-exempt applications are still pending with the IRS, but must include all of them or none. SGOs must be 501c(3) nonprofit organizations. For new SGOs without a track record, states may review governing documents and bylaws. After that, every SGO needs an annual audit.
   
• State SGO Lists: For 2027, states must elect to participate by January 1, 2027, and submit their SGO lists by February 15, 2027.
   
• Income Verification: SGOs can verify income of participating parents with documents like tax returns or W-2s, or with proof of participation in SNAP, TANF, WIC, Section 8 or SSI. Foster children automatically meet the income test. Scholarships for individual tutoring or special-needs services at schools in low-income areas can skip income checks if the school selects students based on academic or other need. To qualify, the school must be in a federally designated low-income census tract, or at least 80% of its students must live in one. The SGO must also get an annual third-party audit, shared with the state, confirming it met these requirements.
   
• Accountability: SGOs must have systems to detect fraud such as duplicate awards, and states must set reporting requirements that support verification and fraud detection. SGOs must certify their compliance to the IRS each year.
   
• IRS Portal: SGOs register through a new IRS portal and give each donor a unique donor number, so donors never have to share Social Security numbers with the SGO. SGOs must send donors a written acknowledgment by January 31.

Next steps

We will explore the proposed regulations in more depth in a forthcoming blog; we will regularly update our Scholarship Tax Credit for Afterschool page; and we will submit our comments to the Treasury and share them with the field.