The One Big Beautiful Bill, signed into law on July 4, creates a new federal scholarship program to expand school choice to more American families. The program provides a compelling opportunity to promote and expand the accessibility of independent schools by allowing taxpayers to claim a 100% tax credit for donations to “scholarship granting organizations” (SGOs), a new type of Section 501(c)(3) charitable organization expressly designed to distribute scholarships to eligible students attending independent schools (education scholarships). The federal scholarship program is set to begin January 1, 2027.
Federal Scholarship Program and Available Tax Credits
This new scholarship model will be funded by charitable contributions to SGOs. Taxpayers who contribute to SGOs will be eligible to receive a dollar-for-dollar tax credit for contributions of up to $1,700 each tax year, which can be carried forward for up to five years. There is no cap on the number of taxpayers who can contribute to SGOs or the total amount of scholarship funding available, which means that an unlimited number of taxpayers could claim a credit in exchange for a $1,700 donation to an SGO. The federal tax credit to donors will be reduced by the amount of any state tax credit that is awarded to such donors.
The amount of each education scholarship will depend on the number of donors contributing funds to SGOs and the funds available. Therefore, independent schools could influence the amount of scholarship funds available by encouraging their communities to contribute to SGOs.
K-12 students whose families earn a household income of up to 300% of their community’s gross median income will be eligible to apply for an education scholarship. This significantly expands the number of families that will be eligible for scholarship funds, as many state school choice programs are limited to low-income families.
For example, based on current data, in New York City students of families earning up $437,400 would be eligible to receive SGO scholarships; students of families in Washington, D.C. earning up to $486,000 would be eligible; and in Dallas students of families earning up to $351,900 would be eligible.
In many instances, this will mean that students already attending independent schools will be eligible to apply for education scholarships under the SGO program. (The 300%-of-median-income threshold will be determined annually based on the data from the preceding year. For example, SGO scholarships would be made available in 2028 to households earning up to 300% of the median income in their area in 2027.) Notably, scholarships awarded by SGOs will not be treated as taxable income to the recipient families.
Participation in the federal program will be determined on a state-by-state basis. Each state must opt-in to participate in the federal scholarship program in order for an SGO to be able to award scholarships to students residing in that state.
Scholarship Granting Organizations (SGOs) Under the Federal School Choice Program
With the federal program poised to infuse more funding to assist students attending independent schools, independent schools may wish to consider the possibility of forming their own SGOs to support their own students. However, rules for the collection and distribution of funds donated to SGOs prevent schools from taking this approach. The bill requires SGOs to provide scholarships to 10 or more students who all reside in the same state and cannot all attend the same school. Furthermore, donors may not designate, and SGOs may not earmark, scholarship funds for a particular student. Thus, even if an independent school formed its own SGO, that organization would not be allowed to limit its scholarship grants exclusively to students attending such school.
It is unclear whether this rule also prohibits contributions from being directed to students attending a particular school or group of schools. The final bill language does not prohibit this practice, but implementing regulations may provide additional parameters for how scholarship funds may be distributed.
If permissible, this could open the possibility for regional associations or groups of independent schools to form SGOs to serve students attending member schools. In any event, groups of schools may find it beneficial to consider forming their own SGOs and to promote them within their local community.
Compliance Obligations for Independent Schools
With any federal program, the primary concern is whether an independent school’s receipt of funds triggers federal compliance obligations, including, most notably, Title IX of the Education Amendments of 1972. Since these education scholarships are funded through private donations rather than public funds, independent schools accepting students with education scholarships should not be considered to have received federal financial assistance. Therefore, participation in the scholarship program will not subject independent schools to federal compliance obligations as a recipient of federal financial assistance.
That said, it remains to be seen whether to-be-drafted regulations implementing the federal scholarship program will impose any additional requirements on independent schools. A previous draft of the bill included a provision prohibiting any governmental control over participating independent schools, but this language was removed in the final version, leaving open the possibility for the Department of Education to impose additional requirements on independent schools that accept students with education scholarship funds. For example, some state voucher programs require participating independent schools to take part in standardized tests, provide data regarding student academic progress, and/or comply with certain health and safety requirements.
