‘Title I for rich kids’ and other predictions for the Federal Scholarship Tax Credit

On Oct. 1, the Treasury Department released its proposed regulations for the Federal Scholarship Tax Credit (FSTC). That marks the informal kickoff of a high-stakes period of decisionmaking for state leaders who have not decided whether their states will participate in the program.

The FSTC is a new funding mechanism that diverts federal tax dollars to families to pay for private school tuition or other eligible educational expenses. The basic idea is that individuals can receive a dollar-for-dollar tax credit if they give up to $1,700 per year to a scholarship granting organization (SGO). SGOs then distribute most of that money to families—after taking a 10% cut for themselves—with broad latitude over who gets money, how much they get, and what they can spend the money on.

Each state must decide by Jan. 1 whether to opt into the FSTC for 2027. About 30 states have signaled they will, including every Republican-led state and a few led by Democrats. For most of the others, it’s a hard choice. On the one hand, there’s plenty to dislike about the FSTC. On the other hand, opting out means that a state’s residents will not have access to funds available to residents elsewhere.

I’ve been very critical of the FSTC, though I’ve acknowledged that the question of whether this is good policy is distinct from the question of whether states should opt in. That left room for the unlikely scenario that Treasury, through its regulations, would allow state leaders to mold this program to align with their states’ needs and values.

We now have Treasury’s proposed regulations, and it’s clear they will offer state leaders no such opportunity. Despite this administration’s emphasis on “returning education to the states,” state leaders have virtually no control over this program after deciding whether they will participate. They can’t stop an SGO from refusing to serve children of a certain religion, disability status, or sexual orientation. They can’t require SGOs to prioritize students in need. They can’t condition an SGO’s continued operation on evidence of strong performance. In effect, governors have an all-or-nothing decision: Opt in and see what happens or stay out.

As we await those decisions, I have a few predictions for where this might go.

Prediction 1: The FSTC will become a highly regressive source of education funding.

Perhaps the most striking element of Treasury’s proposed regulations wasn’t a regulation but a projection. Treasury estimates that the FSTC will grow to a $26 billion program by 2030, and that’s assuming that only 30 states participate. For context, that’s much larger than both Title I-A ($18.4 billion in fiscal year 2025) and the Individuals with Disabilities Education Act ($15.4 billion in fiscal year 2025).

I don’t know if it’s possible to make accurate projections for this program’s size four years out, since I’m expecting major twists and turns before then. (More on that below.) However, if the FSTC grows near that size, it could mark a stunning reversal of the federal government’s decadeslong approach to K-12 funding, which has been to provide supplemental funds to students in need.

The reason: The FSTC is structured in a way that makes it very likely that wealthy kids will benefit disproportionately. That begins with the near-certainty that private school students—roughly one-tenth of all U.S. students and, on average, from relatively high-income families—will collect far more than 10%of FSTC funds. The motivation to pursue FSTC funds seems much clearer for tuition-paying private school families (and their schools) than for public school families.

Even among public school families, those in affluent areas are much better situated to obtain funds than those in poor areas. My colleagues and I recently analyzed where the potential donors to this program live and what we can learn from giving patterns to state programs. We project that the wealthiest counties will generate several times as much FSTC funding per child as the poorest counties. These poorer counties generally have less tax liability, less disposable income, fewer private school students, and fewer resources to dedicate to navigating confusing tax policies.

To be clear, taxpayers in wealthy communities could donate to SGOs that serve low-income students. However, that would defy typical giving patterns and seems especially unlikely now that the FSTC is largely being pitched by advocates as a strategy to benefit one’s own family, school, district, or community. It seems much likelier that we come to see the FSTC as a Title I for rich kids than a source of redistributive, charitable giving.  

Prediction 2: The FSTC will become the largest source of waste, fraud, and abuse we’ve seen in education—and most of it will be legal.

Treasury’s proposed regulations reflect concerns about the potential for waste, fraud, and abuse (WFA) and some sensible attempts to curtail it. For example, the proposed regulations create a pathway for SGOs to submit payments directly to schools without passing through families’ hands first.

There’s an important point about WFA, though, that has been largely missing from the discussion of private school choice programs. There’s illegal WFA and there’s legal WFA.

Illegal WFA is unambiguously a problem. That’s families or SGOs embezzling funds or using them in ways that aren’t allowed by the FSTC. We’re still waiting for specific guidance from Treasury on the FSTC’s eligible expenses, but it’s safe to assume it won’t be okay to spend taxpayer money on luxury hotel stays, condoms, and lingerie (items that appear in records for Arizona’s ESA program). Preventing even this type of illegal WFA will be a real challenge with billions of dollars sloshing through a web of lightly vetted SGOs, providers, and recipients.

But the FSTC is so permissive that there’s plenty of room within the bounds of the law for spending that almost any reasonable person would consider wasteful. That’s the legal WFA. As far as I can tell, there’s still nothing that would prevent an SGO from setting up shop in an affluent community, raising money locally, and then awarding scholarships of, say, $100,000 apiece to ten affluent families—with instructions to use those funds to pay a preferred local tutor. Maybe that’s just waste and abuse (not fraud) if it doesn’t cross the line into illegality, but it’s certainly not good.

Prediction 3: The FSTC’s rollout year will be marred by scandals and critical reporting.

The first year of the FSTC could be very messy. Reporters have had a field day covering wasteful spending in state voucher programs, and the FSTC will provide no shortage of material. In fact, the FSTC is more permissive than most state programs—and far exceeds the reach of any single state program. We should expect a steady stream of reporting on wasteful spending and fraudulent behaviors.

We also should expect stories about FSTC funds being used at institutions that openly discriminate against certain groups of students. Governors who enroll their states in the FSTC can’t prevent SGOs from refusing to serve, say, students of a certain religion or disability status—or children of same-sex parents.

Governors who opt out for 2027 could learn from their peers who opt in, without having these messy stories land on their own doorstep.

Prediction 4: The politics of the FSTC will get increasingly complicated and prompt major changes to the policy.

Some FSTC proponents have a straightforward prediction for how this will play out. As residents of blue states start asking why they can’t get their fair share of FSTC funds, more Democratic governors will opt in. And since it’s hard, politically, to take away benefits once they’re available, we’re on a one-way street to long-term, universal participation.

I don’t know. I think the FSTC’s political story is a long way from being written. Consider some of the variables involved:

First, there’s the public narrative surrounding the FSTC. This is a confusing policy that isn’t on the radar of most Americans (and might never be). It’s entirely possible that a barrage of negative stories will batter the FSTC’s public image and lead to widespread calls for reform. It’s also possible that more Democrats will see opposition to private school choice—and support for public schools—as a potent political issue. Jennifer Berkshire and Jessica Grose have made this case, with each pointing to Gina Hinojosa’s gubernatorial campaign in Texas as a potential narrative changer.

Second, there’s the complex and evolving set of actors involved. The FSTC will make SGOs major players in the education landscape, with control of potentially billions of dollars in public funds and wide discretion over where they go. And the politics surrounding SGOs that serve public schools could get especially complex. There are proposals for public schools to work together—and with large employers—to raise money for a statewide SGO that redistributes funds back to school districts. But will the districts that raise the most money really be okay with their residents’ donations funding other districts?

Third, there’s the changing nature of partisan control of Washington. If Democrats gain control of Congress and/or the White House over the next couple of years, they’ll look to make changes. Maybe a Democratic administration would rewrite the FSTC regulations to give states more control over SGOs. Maybe a Democratic president and Congress would fundamentally change the FSTC through their own budget reconciliation bill. Or maybe they’d just kill it, as most Senate Democrats are already attempting to do.

There are just a lot of unknowns. But in the spirit of making predictions, here’s mine: A hypothetical Democratic president and Congress in 2029 would repeal the FSTC entirely and give that money to families in the form of an expanded child tax credit (CTC). That provides an even more flexible use of funds. Plus, when Congress expanded the CTC in 2021, the child poverty rate promptly plummeted—before bouncing right back up when the expansion lapsed.

These next few months will be interesting, and one can imagine the FSTC going in a lot of different directions. Unfortunately, it’s only getting harder to see it going in a direction that provides better and more equitable opportunities to America’s students.