Beginning in 2027, federal tax policy will create a national framework for K–12 scholarships through the Federal Scholarship Tax Credit. The credit allows individual taxpayers to claim a nonrefundable federal tax credit of up to $1,700 for qualifying cash contributions to approved scholarship-granting organizations in states that elect to participate. Eligible students generally must be able to enroll in public elementary or secondary school and come from households with income at or below 300 percent of area median gross income. Outside estimates suggest the income threshold could cover a large majority of U.S. households, and the program could make several billion dollars available annually depending on state participation and implementation.

The numbers are big. The reach is wider than most people realize. And the rules that govern the program are still being written.

Like many organizations, Modern States is working to understand the FSTC design and how to maximize its impact. As we learn more, several implementation questions have become clear. Although the initial IRS request for comments has closed, we see it as essential to communicate publicly about these issues, because the rules that get written will determine who benefits from the program and who is closed out.

Here’s why we believe the program matters, and why the implementation choices matter even more.

What the FSTC actually covers

The FSTC incorporates the Coverdell ESA definition of qualified elementary and secondary education expenses. That definition is broad, but not unlimited: it includes tuition, fees, academic tutoring, special-needs services, books, supplies, equipment, certain technology and internet access, and some school-connected supplementary services.

Understanding that breadth is essential to understanding the potential impact of the program. It means a federal program often described in terms of school choice should also be able to fund the things that help students succeed wherever they’re enrolled, including in public schools where there is no tuition cost: a tutor, a summer enrichment program, technology, or a credit-by-examination exam.

That last category is where Modern States lives. We offer free online college courses, taught by college professors, that prepare students to earn credit accepted at nearly 3,000 colleges and universities. Learners earn the credit by passing a CLEP exam — a well-established, nationally recognized test offered by the College Board. The courses are free. The exams aren’t, but Modern States’ philanthropy provides scholarships for the cost of the exams to ensure that the fee is not a barrier between a high school student (and many others) and real college credit.

Designed well, the FSTC could make it possible for Modern States and organizations like us to dramatically expand our impact. It could also ensure that the program actually works for learners and families who need it.

Why the rulemaking matters

A program this large will live or die in the details. The set of essential issues for us cluster around five ideas.

Confirm what the statute allows. Coverdell already covers fees for “supplementary items and services” connected to K–12 enrollment. Treasury should clarify that assessment and exam fees that support a K–12 student’s course of study or college-credit pathway — including AP, CLEP, DSST, SAT, ACT, and similar exams — qualify as covered fees. This also means preserving the statutory distinction between expenses “incurred in connection with” enrollment and expenses “required by” the school. A high school student who chooses to take a CLEP exam shouldn’t be excluded because her school didn’t formally require it.

Make sure the program reaches the learners it was built for. Verifying that a family earns under 300 percent of area median income shouldn’t require a small business of paperwork. Treasury should permit low-burden verification pathways, including categorical eligibility through programs families already use, direct certification from public benefit systems, and carefully defined school- or neighborhood-level safe harbors where appropriate.

Even better, private providers, state governments, or the federal government would create an income verification mechanism allowing a family’s eligibility to be verified just once per year, with the result being leveraged by any provider who is aiming to determine eligibility. There are precedents for an approach like this in the college aid space, like the FUTURE Act Direct Data Exchange used by FAFSA, and in other programs like SNAP.

Let providers be providers. Many of the services families use — exam fees, tutoring, online coursework — are delivered by organizations that aren’t schools. Treasury should allow SGOs, under clear procedures, to pay approved providers directly, reimburse providers for verified high-volume services, and rely on standardized provider-collected registration data where the SGO retains responsibility for statutory compliance. Otherwise every individual expense turns into a multi-step SGO workflow, and the families the program is for end up doing the hardest paperwork.

Build in transparency and a real safe harbor. Although delivered through private contributions, the credit is a federal tax expenditure, so foregone tax revenue should be stewarded responsibly. Standardized aggregate reporting on the demographics of the students who got served and how is a floor. The rules should also guard against price inflation. In higher education, policymakers have long debated whether and when demand-side subsidies contribute to tuition increases; the FSTC should be designed to avoid similar incentives.

Clear, narrow pathways for sharing limited student data between providers and SGOs, with strong privacy protections for minors, are essential. And a good-faith safe harbor for organizations that follow Treasury’s prescribed process should be included — without one, SGOs will over-verify to protect themselves, and low-income families will get screened out by friction.

Design for the family with the least time, not the family with the most. This is the through-line for everything above — especially the eligibility approach and letting providers carry the operational load. If using the program is hard, the benefits will flow to the families with the bandwidth to figure it out, and the program will miss the families it was built for. The point of the 300 percent AMI threshold is to reach the families with the least margin to spare. Those are the same families with the least time for paperwork. The rules should be written for them. Missing that would be a serious and avoidable failure.

What this opens up

If Treasury gets the rules right, the FSTC becomes more than a private-school tuition program. It becomes a way to fund the full range of supports that help any and all K–12 students succeed — including the credit-by-examination pathway that lets a learner arrive on a college campus with college credit already on the transcript.

That’s the version of this program we want to see, and it’s the version we believe the statute already permits. We hope that the rulemakers agree.