Treasury Just Released Major Guidance on the Education Freedom Tax Credit. Here’s What It Actually Means.

The U.S. Department of the Treasury released an eye-opening preview of the regulatory framework for the new federal Education Freedom Tax Credit (EFTC). There is a lot of good news to report. Treasury is moving with real intention. The rules are coming into focus, the timeline is firm, and the law is on track.

However, if you did have a chance to look at the official documents surrounding the new guidance you may have seen phrases like “nonrefundable income tax credit,” “section 25F segregated accounts,” and “qualified programmatic audits by independent third parties” — just to name a few.

So, while the news surrounding the latest guidance is good, it’s a lot to unpack.

Here’s what it means — in plain English — for families, donors, and anyone who wants to be part of the EFTC when it launches in January 2027.

But first, let’s rewind and frame the latest news around the EFTC.

What Is the Education Freedom Tax Credit?

The EFTC is a federal tax credit created by Congress that will bring scholarships to states that opt in starting on January 1, 2027.

The mechanism is straightforward: when you make a charitable contribution to a qualified Scholarship Granting Organization (SGO), a nonprofit that connects private donations to education scholarships, you receive a dollar-for-dollar federal tax credit of up to $1,700. You donate first; the credit follows at filing, reducing what you owe the IRS dollar for dollar.

To be clear: this is a tax credit, not a deduction. A deduction only reduces your taxable income. A tax credit reduces your actual tax bill. If you donate $1,700 and owe $2,000 in federal taxes, you now owe $300.

Scholarships funded through SGOs can cover a range of K–12 education expenses, ranging from tutoring for students in public schools to private school tuition, and are directed toward students from lower-income families.

To learn more about how the credit works and whether you qualify, see our AFC Scholarship Fund EFTC explainer.

So What Did Treasury Just Release?

Treasury hasn’t published the full regulations yet as those are expected by end of September 2026.

What they released last week was a detailed preview of what those regulations will say.

The goal? As Treasury Secretary Scott Bessent framed it, it is to give “certainty to states, scholarship-granting organizations, taxpayers, and families alike” as everyone prepares for January 2027.

In other words, think of this preview as the government saying “here’s how the machine is going to work. Start getting ready.”

The preview covered three major areas: what scholarship granting organizations will be required to do, who qualifies for a scholarship, and how donor privacy will be protected. Here’s a breakdown of each.

What SGOs Will Be Required to Do

This is where the guidance gets specific to ensure donations go where they are supposed to. Treasury said they are committed to the goal of pairing broad opportunities with strong administrable safeguards.

The 90% Rule. An eligible SGO must use at least 90% of its income on scholarships for K–12 students. To make compliance straightforward, Treasury is considering a “safe harbor”: SGOs can keep qualified contributions in a dedicated Section 25F (EFTC) account, and this threshold is measured against the funds in that account. For organizations whose primary mission is granting scholarships, this simplifies bookkeeping significantly.

Annual Audits. Every SGO will need to obtain an annual financial and programmatic audit from a qualified independent third party. For smaller organizations, the proposed rules may allow for a streamlined alternative. This is a meaningful accountability measure designed to protect students, parents, and taxpayers.

Multi-State Operations. Some SGOs operate across state lines. The guidance indicates that an SGO can appear on more than one state list — but it must maintain a separate account for each state it serves.

As a reminder, these items remain subject to ongoing legal review, so they are not final, but Treasury intends for proposed regulations to be consistent with this preview.

Who Qualifies for a Scholarship?

The scholarships funded through this program are targeted at students from households with incomes at or below 300% of the area’s median gross income. In practice, this means many American families qualify with roughly 90% of K–12 students eligible.

Scholarships can be used for qualified K–12 expenses at any public, private, or charter school, including tuition, fees, books, and supplies.

Treasury has also confirmed that scholarships may cover additive academic tutoring and special needs services, which is important for families whose children need more support than what’s available in their current school.

The EFTC was designed with a clear priority: to serve students from lower-income families who may be in schools that aren’t meeting their needs, and who lack the financial resources to seek alternatives.

These scholarships are not for the few. They are for the many.

Your Privacy as a Donor Is Protected

One practical detail worth noting, specifically surrounding tax filing.

SGOs will give each donor a written acknowledgment of their contributions that includes a unique donor number generated through an IRS-provided method.

This allows the IRS to verify that a claimed credit is legitimate without the donor ever having to share their Social Security Number with the SGO.

It’s a simple but meaningful privacy protection built directly into the system.

The Timeline: What Happens Next?

End of September 2026: Treasury issues proposed regulations. States, SGOs, and donors can rely on these for the 2027 tax year.

January 1, 2027: The credit goes live. States must submit SGO lists to the IRS.

Ongoing: The IRS will build a dedicated SGO portal to support administration, donor reporting, and transparency, but that may be coming later.

The bottom line: a clear regulatory framework arrives in September, the credit goes live in January, and the IRS is building the infrastructure to make it easy to navigate. This is real, it’s happening soon, and the best time to prepare is now.

Luckily, the AFC Scholarship Fund is already well-positioned and ready thanks to its established national footprint to help connect every donor to every school for every family.

Register your interest with AFC Scholarship Fund today so that when the EFTC activates on January 1, 2027, your dollar-for-dollar gift is ready to change a child’s path.