The One Big Beautiful Bill and School Choice

On July 4, 2025, the One Big Beautiful Bill (“OBBB”) was signed into law. One of the notable impacts of this sweeping legislation is the creation of a federal school voucher program designed to expand school choice by providing the opportunity for K-12 students to receive financial support for certain qualifying educational expenses. 

How Does it Work?

This new law creates a dollar-for-dollar nonrefundable tax credit of up to $1,700 for donations made to qualifying scholarship granting organizations (“SGOs”) that provide scholarships to elementary and secondary school students for educational expenses such as tuition, fees, tutoring, books, and other qualifying educational costs. The federal tax credit will be reduced if a taxpayer also claims a state-level credit for the same contribution and the credit may be carried forward for up to five years. 

Scholarships are only available to students eligible to enroll in a public K-12 school and the tax credit is available only if the funds are used to provide scholarships to students from households with an income of up to 300% of the area median gross income. Scholarships awarded by SGOs will not be treated as taxable income to the recipient.  

Although the tax credit will take effect January 1, 2027, because it is an opt-in program, each state will need to decide whether it will choose to voluntarily participate. If a state opts in, it would submit to the IRS a list of qualified SGOs located within the state. Further guidance is anticipated from both the states that opt-in and the US Treasury about SGOs and this credit.  

What Qualifies as a Scholarship Granting Organization (SGO)?

To qualify as an SGO under the OBBB, the tax-exempt organization must be a section 501(c)(3) public charity and not a private foundation. The organization must also:

1. Provide scholarships to 10 or more students who do not all attend the same school;
2. Operate exclusively within the state where donations are received; 
3. Dedicate 90% or more of revenue to providing scholarships to eligible students; 
4. Not co-mingle qualified contributions with other funds; 
5. Avoid earmarking scholarship funds for a particular student and cannot allow donors to designate scholarship funds for a particular student; and 
6. Exclude board members and major donors from scholarship eligibility.

Tax-exempt independent schools likely will not qualify as SGOs themselves because of the requirement that 90% of revenue must be dedicated to providing scholarships to eligible students.  However, independent schools may seek to partner with or create a separate SGO. However, such partnership must comply with each of the requirements outlined above including the restriction that the SGO not earmark a scholarship for a particular student and that it must provide scholarships to 10 or more students that do not attend the same school. Further guidance from the Treasury hopefully will clarify whether scholarships can be directed at students attending a particular school. 

Potential Impact

Whether and which states will opt in to this new federal program is yet to be seen. However, if a state opts in, such scholarships are likely to expand school choice opportunities for eligible students, impacting both public and non-public school enrollment and funding.