Federal Scholarship Tax Credit

What is the Federal Scholarship Tax Credit (FSTC)?

Starting Jan. 1, 2027, in states that choose to participate, individuals can donate to a certified SGO and receive that same amount back as a dollar-for-dollar federal tax credit — up to $1,700 per taxpayer, per year ($3,400 for married couples filing jointly). This program is also known as the Education Freedom Tax Credit (EFTC) and was enacted into law as the Educational Choice for Children Act (ECCA). BenefitEd’s platform makes giving as simple as offering a payroll election option to your employees that lets them take advantage of this tax credit.

How the Tax Credit Works for Employees

1

Employee Identifies an SGO to Support

Employees choose a Scholarship Granting Organization (SGO) to support — often based on its mission or community, since by law every SGO funds students across multiple schools. The SGO must be listed by a state that has opted in to the FSTC. If an employee’s own state hasn’t opted in yet, they can still donate to a qualifying SGO in a state that has.

2

Sets Up a Payroll Deduction

Employees log in to the company's BenefitEd portal, where they choose an SGO and school they'd like to support, along with their annual contribution amount. That amount spreads automatically across each paycheck based on the employer's payroll cycle. Employees can also adjust their W-4 withholding — BenefitEd coordinates with their employer — to help offset the paycheck impact.

3

BenefitEd Securely Transfers Funds

BenefitEd's platform connects securely with your HR and payroll systems through an encrypted file transfer or API connection to process each employee's payroll deduction and route funds to their selected SGO. Every transaction is tracked, giving your HR team a clear reporting and audit trail.

4

SGO Awards the Scholarship

The SGO reviews applications and awards scholarships to eligible students. Federal rules require priority go first to students continuing a scholarship from the year before, then their siblings — protecting continuity for families already relying on the program. Beyond that, the SGO awards remaining scholarships to newly eligible students as funding allows.

5

Employee Files Taxes

Employees receive a receipt from their SGO documenting their total contribution for the year, which they use when filing taxes. They can then claim a dollar-for-dollar federal credit for what they donated, up to $1,700 — reducing what they owe. If the credit is more than they owe, the unused portion carries forward for up to five years.

Because every contribution flows through an SGO, it helps to understand exactly what one is and what it’s required to do.

The SGO’s Role in Administering the FSTC

An SGO is the certified nonprofit at the center of the program, collecting contributions and awarding scholarships to eligible K-12 students. By law, an SGO must serve students across more than one school and can’t earmark funds for a specific student — though some allow donors to recommend a specific school. SGOs must direct at least 90% of contributions to student scholarships, capping their own administrative costs at 10%.

SGOs can support private faith-based schools, public schools, and charter schools. Home school and hybrid learning students may also qualify, though eligibility depends on whether their state legally defines homeschooling as a school — not all states do.

How FSTC Scholarship Funds Support Students

Once an SGO awards a scholarship, funds go to the eligible family — not the school directly — to cover qualified K-12 expenses, including:

Tuition and fees.
Tutoring.
Books and supplies.
Technology and internet access.
Special needs services.
Room and board, uniforms, and transportation.
Extended day programs, where the school requires or provides them.

Both public and private school students can qualify, though funds are typically used differently:

Private school families often apply scholarship funds toward tuition.
Public school families, who don’t pay tuition, can instead use funds for services their school may not otherwise cover — tutoring, before- and after-school care, or additional support for a student with special needs.

Once a scholarship is awarded, how it’s used is between the SGO and the family — BenefitEd’s role ends at making the contribution itself simple.

How Organizations Benefit

Whether you’re a company, nonprofit, or educational institution, offering this benefit to employees looks a little different.

Companies and Nonprofits

A distinctive benefit for open enrollment, with little administrative lift of a new plan. Payroll deduction simplifies paperwork, making it easy for employees to donate to a certified SGO and receive a scholarship tax credit.

Schools as Employers

A payroll deduction benefit that’s easy to offer employees — and one where employees can choose to direct new tax credit scholarships toward your own students, public or private.

Key Federal Scholarship Tax Credit Facts

Credit Value

Up to $1,700 per taxpayer, per year ($3,400 for married couples filing jointly) — dollar-for-dollar, nonrefundable.

Effective Date

Contributions made on or after Jan. 1, 2027.

Eligibility for a Scholarship Tax Credit

Household income at or below 300% of the area median gross income.

SGO Spending Rule

At least 90% of contributions go directly to scholarships.

State Availability

Any taxpayer can claim this credit, regardless of where they live. What varies by state is which SGOs, and the students they support, are eligible: each state must opt in annually before its SGOs can accept credit-eligible contributions.

Frequently Asked Questions

It's a credit — a dollar-for-dollar reduction of what the employee owes on their federal taxes, not just a deduction from their taxable income.

The plan year runs Jan. 1 through Dec. 31, matching the tax year in which contributions are made.

The payroll deduction comes out of each paycheck, so the money is out of pocket until taxes are filed. At tax time, employees get the full amount back (up to $1,700) as a credit against what they owe. Employees can also adjust their W-4 withholding, with BenefitEd coordinating between them and their employer, to help offset the paycheck impact in the meantime.

Yes. They can contribute up to $1,700 per year, but they’re not required to give the maximum.

Nothing in the law limits individuals to one SGO or school — the $1,700 cap applies to their total qualified contributions for the year. Through BenefitEd’s payroll deduction, employees will select one SGO and school; if they’d like to support more, they’re welcome to make additional donations directly.

Yes. Employees can designate a specific school to support — they just can't designate a specific student. Funds go to that school's scholarship fund as a whole.

Any employee can claim the federal credit no matter where they live. State opt-in only affects which students they can support: if an employee's own state hasn't opted in yet, they can still contribute to a qualifying SGO in a state that has, supporting students there instead of at home. See the state list on this page for where SGOs are currently available.

No. This is an individual federal tax credit for the taxpayer who contributes — not a business credit. Employers make it easy to give through payroll deduction; they don't receive the credit themselves.

Have Questions About the Federal Scholarship Tax Credit?

This BenefitEd option is new, and the details can be a lot to take in. Our team can walk you through how it works and what it could mean for your organization or your community.

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Disclaimer: This page is for general informational purposes only and does not constitute tax, legal, or financial advice. Tax laws and regulations are subject to change, and individual circumstances vary. Consult a qualified tax advisor or financial professional regarding your specific situation.