The Federal Tax Credit for Scholarships: School Choice That Public Schools Can Love

Some questions remain, but public school students can benefit from the FTCS

Can the Federal Tax Credit for Scholarships relieve the financial stress of public schools facing declining enrollment? It’s an unconventional approach that might offer real relief to districts losing students, while offering students additional learning opportunities.

School districts across the country are confronting a difficult financial reality. Enrollment has declined in many communities and federal pandemic relief funds have expired. At the same time, staffing and other recurring expenses have not always adjusted to match the declining number of students being served. Is this the opportunity for public schools to grapple with their financial woes through a federal tax credit program?

Declining enrollment does not automatically produce a financial crisis by itself. Districts can, and regularly do, adjust their operations as student populations change. But those adjustments take time, and districts that delay difficult decisions can find themselves facing deficits, layoffs, school closures or abrupt program cuts.

The new Federal Tax Credit for Scholarships, or FTCS, provides an option that could help students and ease this disruption to public schools all at once.

So, how does the new tax credit work? Beginning in 2027, taxpayers will be able to receive a federal tax credit of up to $1,700 for qualified contributions to scholarship-granting organizations, or SGOs. Although taxpayers in all 50 states plus DC (who have a federal tax liability as great as their contribution) can receive a federal tax credit, scholarships are available for children eligible to attend elementary or secondary school only in states that elect to participate in the FTCS.

Many discussions have focused on private school tuition, which may be funded by scholarships. But that’s only one potential application. Marguerite Roza and Maggie Cicco of Georgetown University’s Edunomics Lab point out in a recent article that public school students who wish to remain in their public school are eligible, too. And they argue that districts should begin preparing now.

How districts might support participation

Roza and Cicco propose that districts charge a fixed fee for a package of supplemental services such as tutoring, homework help, field trips, clubs, arts programs, or career preparation. An SGO could then provide scholarships covering that fee for eligible students.

Edunomics estimates that districts might eventually generate $1,000 per student or more under such a model. The actual amount would depend on factors like taxpayer participation, SGO operations, state laws and forthcoming federal rules. But the possibility is significant for districts adjusting their recurring costs to lower enrollment.

Employers are central to the Edunomics strategy. School districts, universities, hospitals and large private employers could encourage workers to contribute to SGOs through payroll deductions. Employees could select an SGO and indicate where they want their contribution directed. Because the contribution would be offset by a corresponding reduction in federal tax withholding, Edunomics argues that participating workers could support scholarships without reducing their take-home pay.

Private vs. Public Budgeting

The payroll deduction mechanism could bring substantial participation on the giving side. It would also generate substantial competitive pressures.

Public and private schools may face pressure to explain their value more clearly, both to families and to potential donors in their communities. Districts may find it necessary to strengthen their relationships with families to demonstrate that new funding produces meaningful opportunities.

That competition could be healthy. But will it be evenly balanced?

The public schooling sector is vastly larger than the private school sector (roughly 90% vs. 10% in terms of enrollment and staff). Currently, funding for choice programs is equal to less than 2% of public K-12 funding even though 4% of students in states with choice programs participate. Districts employ millions of people. This suggests that if districts promote payroll deductions through their own workforces toward district-oriented SGOs, public schools could gain an organizational advantage far greater than private schools, microschools and independent providers.

Opportunities and blind spots

The proposal identifies a public school SGO funding advantage yet raises questions about how districts might use the money.

Question 1: Could the FTCS become a district-controlled mechanism through which districts tap new revenue streams and expand staffing? If a district can relabel existing tutoring, clubs or enrichment programs as fee-based services, then they could use scholarships to cover those costs and redirect existing funds elsewhere (provided those services are not in a state’s definition of required public education). That outcome would cut against one of the central aims of school choice policy: expanding opportunity for students and families to choose educational options that best fit the needs of students. A federal tax credit intended to incentivize charitable giving in support of educational freedom for students could inadvertently slow the growth of a more pluralistic provider market if its infrastructure becomes dominated by established school systems.

Why is this a problem? Because what might initially look like a windfall for public school funding ignores the central core of the FTCS. No scholarships are awarded to schools. Scholarships must be given directly to students, whose parents have the authority to receive and apply those funds for the benefit of the student’s education. Educational choice empowers families to choose education providers who must answer to them, not the other way around.

Whereas there are questions about how districts may use FTCS funding, none of these concerns mean public school students should be excluded. Public school students are eligible to receive FTCS scholarships, full stop. Districts should be encouraged to partner with interested SGOs, encourage district employees to contribute to such SGOs through payroll deduction, provide services that families value and let families choose for themselves.

Question 2: How should districts budget FTCS funding received from families of students enrolled in their schools? Districts must understand that FTCS scholarships are not comparable to stable formula funding. FTCS is not an education program; scholarships are funded by generous individuals who are incentivized to give by a federal tax credit. As such, contributions to SGOs funding scholarships for public school students may fluctuate from year to year, proving sensitive to economic disruptions. Student interest in any public school service may also rise or fall; parents and students, not schools, will determine whether students continue to use scholarship funding for services offered by the districts. Districts should only create permanent positions or recurring obligations after experience with the FTCS shows that there is continuing demand for their services.

FTCS does not fund any institution. Any public, private, or religious school receives funding as a result of the FTCS only if the student/parent recipient decides that the school provides education that the student wants and needs. FTCS expands access to learning opportunities for students.

Takeaways and silver linings

Even though the FTCS is designed as a true benefit to students and parents, there is reason for both public and private education providers to be optimistic about it. Students who are failing to thrive in any school will have opportunity to choose a different manner and place to learn, and that means any school (public, private, or religious) could see an uptick in enrollment.

Also, any school that has been unable to provide or afford a variety of services for children with special needs or to provide enrichment courses like art, music, and advanced placement may now be able to offer those services to a student using FTCS funding. These students could receive what they need without leaving the school where they are currently enrolled. For public schools navigating enrollment decline and any school looking to welcome new students, the FTCS empowers students and parents to choose those schools; but the choice belongs to families.

Educational choice is primarily a close-to-home issue. Decision-making rests in the hands of parents, and school choice policy is the responsibility of policymakers at the local and state level. A federal tax credit is not a substitute for good statewide education policies that fund student learning, encourage new education providers, and enhance educational pluralism.

However, the FTCS will, if properly implemented, boost opportunity for students in school choice states, and empower students in states that have not yet enacted state-supported school choice. We hope this will provide families with expanded educational opportunities which will invigorate all providers of education, both public and private, to offer a wide variety of learning options that will help children thrive.

As a note for our readers, EdChoice is monitoring FTCS developments closely and provides regular updates available here.