Donors trust a Scholarship Granting Organization (SGO) with real money meant for real kids. The federal law behind the Education Freedom Tax Credit (EFTC) backs that trust with one of the strictest spending standards in the nonprofit sector: the 90/10 rule.
What the rule requires
A qualifying SGO must spend at least 90% of its income on scholarships for eligible students, leaving roughly 10% to cover everything else: staff, technology, audits, legal costs, fundraising, donor communication, and income verification. For comparison, charity evaluators often consider 70 to 85% program spending strong. This federal standard is meaningfully stricter, which is exactly why operational discipline isn’t optional for an SGO, it’s a legal requirement.
“Income,” not simply “donations received”
The law measures the 90% test against the organization’s income, a broader base than donations alone, which can include investment earnings and interest. Treasury’s June 2026 preview of the forthcoming regulations gave SGOs a practical way to manage this: an organization can use a safe harbor that measures its “income” by the amount held in a dedicated, segregated account used exclusively for qualified contributions, including any earnings on that account. For an SGO operating across more than one state, this safe harbor is applied separately for each state’s dedicated account.
Serving more than one school
The law requires an SGO to provide scholarships to at least 10 students who do not all attend the same school. This prevents any organization from functioning as a private channel for a single school or family, and it’s a structural requirement that shapes how broadly an SGO can define its mission.
Award priority, not pure discretion
Awards must follow a required order: students who received a scholarship the previous school year come first, followed by eligible students with a sibling who previously received an award from the same organization. Only after that does an SGO apply its own additional criteria.
No earmarking, no self-dealing
A donor can choose which SGO to support, by geography, mission, or values, but cannot direct a gift to a specific, named child. Contributions flow into a general pool and are awarded under the required priority order and the organization’s published criteria. Separately, an SGO cannot award a scholarship to a “disqualified person,” a category that generally includes substantial contributors, officers, directors, and their family members, which is why a credible SGO maintains a conflict-of-interest policy and actively screens for it.
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Separate accounts, from day one
To qualify at all, an SGO must prevent commingling of qualified contributions by maintaining one or more accounts used exclusively for them. This is a definitional requirement, not a bookkeeping preference; an organization that fails it does not qualify as an SGO in the first place.
Verifying household income
An SGO must verify the household income and family size of every applicant and limit awards to households at or below the program’s income threshold, based on the prior year’s income. This is recurring, document-heavy work, and it is precisely the kind of task that threatens the 10% administrative cap if handled without efficient systems.
Every one of these requirements exists to answer the same underlying question a donor is really asking when they give: will my gift actually reach a child, cleanly and accountably? That is the standard AFC Scholarship Fund holds itself to, and it is the standard every credible SGO in this space should be measured against.
A qualifying SGO must spend at least 90% of its income on scholarships for eligible students, leaving roughly 10% for all administrative costs combined. The law measures this against “income,” which is broader than “donations.”
Generally, substantial contributors, officers, directors, and their family members. This rule prevents insiders from directing scholarship funds to their own families.
No. Contributions go into a general scholarship pool and are awarded under the organization’s criteria and the required priority order, which favors renewing students, then their siblings, before new applicants.
