IRS, Treasury Start Process of Implementing New Federal School Choice Program

December 10, 2025

H.R. 1, the reconciliation bill containing the legislative recommendations of the Congress pursuant to the Concurrent Resolution on the Budget for Fiscal Year 2025, otherwise known as the “One Big Beautiful Bill Act,” or OBBBA, passed the Congress in early July and was signed into law by President Trump on July 4^th. It contained several provisions relating to education, including a number of major reforms of student loans, and it imposed higher taxes on college and university endowments. But perhaps the most controversial education provision was the creation of a national program of publicly funded private school subsidies, similar to those currently found in many states. It is the first federally funded, nationwide private school choice program, and the Internal Revenue Service (IRS) and the Treasury Department have recently requested public comments on its implementation, which is scheduled to begin January 1, 2027. Comments are due by December 26, 2025, and are expected to be followed by draft regulations next year.

By way of background, the OBBBA provides a federal tax incentive to raise funds for families’ educational expenses, including private school tuition at secular and religious schools, as well as costs incurred for children at public and private schools such as fees, tutoring, educational therapies, transportation, technology and other expenses. It would also apply to homeschooling costs.

Specifically, the OBBBA creates a new nonrefundable $1,700 tax credit for cash or marketable security donations made to “scholarship-granting organizations” (SGOs), entities that provide scholarships for elementary and high school students. The credit would be available instead of a charitable contribution deduction and any excess over that amount may be carried over for five years.

In short, donors who gave money or stock to eligible scholarship programs would receive 100 percent of the contribution back in the form of a discount on their taxes. It would thereby permit owners of stock to avoid paying taxes they would usually face if they otherwise donated or transferred their stock. According to the Institute on Taxation and Economic Policy, there is no other charitable giving structure that allows this type of dollar-for-dollar tax incentive.

To be eligible, the recipient entity must be a 501(c)(3) organization that provides scholarships to ten or more students who do not all attend the same school and cannot be affiliated with a specific school. Also, the entity cannot be a private foundation.

The recipient 501(c)(3) organization must also spend not less than 90 percent of its income for scholarships providing qualified elementary or high school education expenses. These include tuition, fees, books, room and board, uniforms and computer technology or equipment. Parents cannot direct their tax credit directly to their child’s education expenses; rather, the scholarship-granting organizations are to independently determine students’ eligibility.

Finally, students who qualify to be scholarship recipients must be eligible to enroll in a public elementary or high school and must be members of a household with an income which, for the prior year, is not greater than 300 percent of the median gross income of the locality or geographic area in which the student resides.

The version of the provision originally passed by the House would have allowed up to $5 billion in tax credits a year, running through 2029. The final version in the OBBBA, however, does not cap the program’s cost, and it has no expiration date.

Importantly, however, instead of requiring mandatory participation – as was contained in the original House-passed version — states can opt out of participating, meaning none of the students in that state would be eligible for the program. That is, in order for contributions to an SGO in a State or the District of Columbia to be eligible for this credit, the State must first choose to participate by providing the IRS with a list of the SGOs located in the State that satisfy the SGO requirements. This election must be made by the Governor of the State or by “such other individual, agency, or entity as is designated under State law to make such elections on behalf of the State with respect to Federal tax benefits.”

The request for comments is contained in Notice 2025-70, which advises that Treasury and the IRS intend to issue proposed regulations and are currently seeking comments from interested parties on issues that should be addressed in the forthcoming regulations. Specifically, comments are requested on the following issues:

A participating State’s required annual certification of SGOs within the State that meet the statutory requirements to qualify as an SGO. (The Notice specifies that reliance by a covered State on self-certifications by SGOs would not be sufficient.)
Policies and procedures implemented by electing States to ensure that the required certification is accurate and complete.
Issues involving single-State organizations, organizations that may fundraise and award scholarships in more than one State, and organizations operating under other fact patterns that may wish to qualify as SGOs.
SGOs’ reporting and recordkeeping requirements.

K-12 Dive — a news and analysis platform focused on K-12 education that is rated by Media Bias/Fact Check as “least biased” based on minimal editorializing of information, factual reporting due to proper sourcing and a clean fact-check record – points out that the IRS announcement specifically said the scholarships would be directed toward SGOs that serve elementary and secondary school students from low- and middle-income families.

However, student financial eligibility is based on a household income up to 300 percent of an area’s median income, as defined by the U.S. Department of Housing and Urban Development. Furthermore, ACE Scholarships, a Denver-based nonprofit SGO that manages private school scholarships across multiple states, says this “inclusive income threshold” is estimated to include 85 percent to 90 percent of students nationwide who may be eligible for scholarships under the federal program. (Emphasis added.)

Also, Marie Sapirie, writing in Forbes in August, points out that, unlike the House’s initial proposal, the final version has no volume cap on the amount of qualified contributions that can be made (noted above), “which means that the experiment in expanding the tax code into a broad-based educational social welfare program is potentially quite expensive.” For example, she notes that the Joint Committee on Taxation (JCT) estimated that the cost of the new provision will be $25.9 billion over the 10-year budget window.

Sapirie also underscores that limiting the scholarships to children whose families have incomes that are 300 percent or less of the area’s median gross income “isn’t a terribly meaningful restriction,” noting that, “[f]or reference, the Orlando, Florida, suburb of Winter Park has a median gross income of $98,100, making the federal handouts available to families making up to $294,300,” and that the median gross income of Bethesda, Maryland, is $162,000, so recipients can have up to $486,000 in household income.

Finally, Sapirie warns that the new program will be “the dawn of semipublic schools,” emphasizing that ‘[p]arents who are forking over hefty sums so that their children can attend a private school will likely soon find their schools are semipublic institutions subsidized by federal school choice dollars — and more expensive in the bargain.” For example, she foresees that “[f]ormerly private schools will also have far greater exposure to increasing federal rules about how they operate,’ and that to the extent “these are written into the tax code, parents will probably have limited opportunities to challenge them.”

Both the National Education Association (NEA) and the American Federation of Teachers (AFT) are strongly critical of federal voucher and tax-credit scholarship initiatives. NEA has consistently opposed them, arguing that they “siphon off scarce resources from public schools” and reduce accountability, and that public funds should remain in public schools, serving all students rather than subsidizing private education. AFT President Randi Weingarten has repeatedly described vouchers and tax-credit scholarships as “a backdoor to defunding public education.”

However, other important voices in education policy have a slightly different take on this particular OBBBA program. For example, Jon Valant — the director of the Brown Center on Education Policy and a senior fellow in Governance Studies at Brookings, where he holds the Herman and George R. Brown Chair in education studies – has written a commentary on the new program for Brookings – a think tank in Washington, D.C. that conducts research and education in the social sciences, primarily in economics (and tax policy), metropolitan policy, governance, foreign policy, global economy, and economic development, and is called the most cited think tank in the world, according to Wikipedia. Valant argues that the OBBBA’s tax-credit scholarship program “is a mess that might be worth opting into anyway.”

Why? He says that Democratic state leaders will “face hard decisions about whether to opt into the new federal tax-credit scholarship program” because “[i]t’s possible these funds could support educational choice in red states and educational enrichment in blue states.”

Although he calls the new scholarship program “terribly flawed,” he also thinks State leaders will need to decide whether to opt into a program “that could become a major source of federal education funding.” “Red-state Republicans are sure to opt in,” he projects, but “Blue-state Democrats have a decision to make.” He argues that the question is “whether they can mold this program into something that aligns with their states’ priorities,” which he thinks is possible.

For example, while the new “scholarships” provided to families to pay for eligible educational expenses can certainly cover private school tuition, they are also eligible to cover expenses like tutoring and technology costs for students enrolled in private or public schools. They could cover special needs services. They could cover transportation or enrollment costs to attend specialized classes not available in a student’s own school. They could cover after-school programs.

Also, State leaders can set rules for the SGOs within their borders. “For example, a state could prohibit SGOs from discriminating based on sexual orientation or religion, and it could require SGOs to provide certain performance-related information (e.g., test scores for scholarship recipients),” Valant argues.

In summary, he says that whether this is good policy design “isn’t the question before state leaders.” Instead, he says they have to “figure out whether to opt in,” which he acknowledges is “a plenty-complicated question of its own.”

In any case, the first steps in designing this new program are being fashioned now, and those who care about the future of public education would be wise to follow the process closely. Commentors are directed to use the Federal e-Rulemaking portal to submit comments (indicate “IRS-2025-0466”) by Dec. 26, 2025. Paper submissions should be sent to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-70), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.