What is the Education Freedom Tax Credit? The 2026 Guide for SGOs

The Education Freedom Tax Credit (EFTC), represents the largest expansion of school choice in U.S. history and Scholarship Granting Organizations (SGOs) will be at the center of it. 

Starting on January 1, 2027, SGOs will have the opportunity to administer federal tax credit scholarships. They will be managing everything: donor contributions, student applications, awarding scholarships, disbursing funds, and tax compliance reporting. For established SGOs, this is a chance to scale operations and serve more families. For new SGOs in this market, it's a greenfield opportunity in this rapidly growing education and tax-saving program.

To help SGOs navigate these complexities, we've outlined 7 key considerations every SGO should address before the 2027 launch.

Federal Education Freedom Tax Credit Overview

What is the Education Freedom Tax Credit?

The Education Freedom Tax Credit is a permanent, uncapped provision in the federal tax code that allows individuals and corporations to redirect their federal tax liability toward K-12 education scholarships. Enacted as part of the One Big Beautiful Bill Act (signed July 4, 2025) and effective January 1, 2027, EFTC creates a dollar-for-dollar federal tax credit for donations made to qualifying Scholarship Granting Organizations. Unlike state programs with caps, enrollment limits, or sunset provisions, EFTC represents a structural shift in education funding, positioning SGOs as the primary administrators of what could become the nation's largest school choice program.

The Education Freedom Tax Credit supports national education choice. Using the Education FreedomTax Credit, taxpayers can receive a credit of up to $1,700 for contributions made to SGOs that would otherwise have been owed to the government in Federal income taxes. A tax credit reduces the amount of Federal income tax owed dollar-for-dollar (unlike a deduction, which decreases taxable income). The tax credit is available to any individual who is a citizen or resident of one of the States or the District of Columbia and makes qualified contribution(s) to SGO(s) during the taxable year.

SGOs then use these funds to provide scholarships to children to attend a school of choice or to access other education-related services and products.

Although the amount of a donor’s tax credit is limited to $1,700, scholarship amounts are not capped and will be determined by the SGO awarding those scholarships based on the mission of that SGO.

Most students in participating states will be eligible to receive SGO scholarships.

Taxpayers can begin claiming the credit for contributions made in January 2027.

Key Program Features

• Dollar-for-dollar federal tax credit up to $1,700 Donors receive a 100% credit against federal income tax liability

• Permanent and uncapped No annual appropriations, no enrollment caps, no sunset clause; written directly into the federal tax code

• State opt-in required States must affirmatively opt in for their residents to participate; SGOs can only serve families in participating states

• First-mover advantage window SGOs that establish operations and brand presence before the January 2027 launch will have significant competitive positioning

• SGOs determine the scale and scope of their operations An SGO must operate within Coverdell parameters and serve at least 10 students across at least 2 schools

How the Education Freedom Tax Credit Works

SGOs are the operational backbone of the Education Freedom Tax Credit. They are the primary contact point for donors, schools and families participating in this tax credit program. Your infrastructure, compliance and overall trust of your SGO are essential.

Donors - Individual donations only, capped at $1,700, contributed to SGOs

SGOs - Scholarship Granting Organizations manage donations, student applications, student verification, financial compliance, and disbursements to schools and students

Students - K-12 families receive scholarship awards from SGOs

SGO Requirements & Eligibility

Federal Requirements for SGOs

• Must be a 501(c)(3) (not a private foundation)
• Use at least 90% of donations for scholarships
• Award to minimum of 10 students across at least 2 schools
• Verify family income and ensure recipients meet eligibility requirements
• File annual reports with oversight by the IRS and Department of the Treasury
• Donors cannot earmark funds for specific students

State Certification Process

• States must opt in to the Education Freedom Tax Credit program
• SGOs must be certified by the state annually

Ideal SGOs for Education Freedom Tax Credit

• Existing SGOs - SGOs already operating state scholarship programs have infrastructure and established relationships with schools and families. They can leverage operational systems to expand into Education Freedom Tax Credit. Learn more how existing SGOs can prepare for the federal program.

• Single-state SGOs - Focusing on a single state can expand impact to serve families without the complexity of a multi-state expansion. Education Freedom Tax Credit provides a new funding source to allow SGOs to deepen work in an existing community with local expertise and community relationships.

• Multi-state SGOs - Operating across state lines may be more complex, but the advantages are obvious. The broader scale means more schools, which means more scholarships available for more families.

• Religiously affiliated SGOs - Faith-based SGOs have deep connections with their associated schools and families. Aligning values for education is important. A trusted mission and focus with faith communities make SGOs natural partners for schools and families wanting to take advantage of tax credits and educate kids.

• States stacking SGO funds - SGOs in states that allow scholarship stacking can offer families the maximum benefit of state and federal programs. 

Problems SGOs Must Solve for Education Freedom Tax Credit

This opportunity comes with an operational complexity that SGOs must solve well ahead of the January 1, 2027 kickoff. You will have to handle high-volume fundraising, disbursing millions of dollars across hundreds or thousands of schools and students, multi-state compliance, real-time financial reporting, and all within the federal 10% administrative cap. Addressing the following concerns will position your SGO to succeed. Based on our experience working with SGOs, we've identified the top 6 common challenges SGOs face with EFTC.

Fundraising and Disbursements

• Becoming the SGO of choice for enough donors at $1,700/donation
• Partnering with schools to funnel donors to your SGO
• Easy to use donation platform
• Processing ACH, Credit Cards and Checks
• Disbursing funds to individual students and schools in high volumes

Multi-Purpose SGO Platform

• Easy to use platform for many schools to access funds
• Reporting on real-time funds available per school and/or student
• Tax reporting, filing report, and automation

One of the most critical decisions SGOs face is whether to build custom technology or buy an existing platform. Our comprehensive Build vs Buy guide breaks down the costs, timelines, and trade-offs.

School and Student Verification

• Verify student eligibility for scholarships
• Student application management for scholarships

Operational Considerations

• Operating within the 10% margin
• Fundraising and disbursing alongside existing state tax credit scholarship programs
• High-volume disbursement constraints with banks across multiple schools and states
• Finding enough donors and partner schools

Donor Benefits with Education Freedom Tax Credit

Why should your donors care about Education Freedom Tax Credit?

• Dollar-for-dollar federal tax credit up to $1,700 to reduce federal tax liabilities
• Zero funding cap, meaning donors can contribute at any point throughout the year
• Unused credits may be carried forward for up to five years
• There is no overall federal cap on credits issued.
• Education Freedom Tax Credit is stackable with state tax credits
• Funds go directly to student scholarships, not government programs

For answers to common donor questions about tax credits, eligibility, and how the program works, see our comprehensive Tax Credit Scholarship FAQ.

How Education Freedom Tax Credit Works with State Tax Credits

Donors may qualify for both state and federal tax credits if separate donations are made to each program. You cannot claim both credits for the same contribution.

Student Eligibility & Scholarship Fund Uses

Who is eligible?

• Income threshold: 300% of AMI (Area Median Gross Income)
• Must be eligible for public K-12 enrollment
• Priority given to previous scholarship students and siblings

Use of Funds

• The same broad range of educational expenses as Coverdell Education Savings Accounts

• K-12 tuition at any qualified school including public, private, religious, microschools, homeschool
• Educational materials including books, supplies, curriculum, online educational materials
• Tutoring services
• Dual enrollment courses for college preparation
• Educational therapies such as OT, PT, speech-language, behavioral therapy
• Transportation

Education Freedom Tax Credit Timeline

Key Dates for SGOs

• Early 2026: Department of Treasury rulemaking process
• January 1, 2027: Program launches, states certify SGOs
• 2027: First credits available to donors

Next Steps for SGOs

Preparing for Education Freedom Tax Credit requires strategic planning across multiple areas:

• Review the top 6 operational challenges SGOs will face and how to solve them
• Assess whether to build or buy your SGO platform
• Follow our 7-step preparation checklist for the 2027 launch
• Educate stakeholders using our comprehensive FAQ