In a report published on September 9 with the American Federation for Children Growth Fund, I answer a question on the other side of my previous report on which students can receive a scholarship: who can fund one?
I find that 121.5 million taxpayers, nearly three of every four people who file a federal return, can give to a scholarship granting organization and claim a dollar-for-dollar credit under Education Freedom Tax Credit (EFTC) starting in 2027. In contrast to the rules on student eligibility which require that students live in states that have opted in to the EFTC, donors face no such restriction. Any taxpayer with federal tax liability is eligible to give up to $1,700 and receive the federal tax credit. As of September 2026, 31 states have opted in or signaled their intent to opt in to the EFTC. The catch for those remaining 19 states plus D.C. is that eligible donors in those states can still make donations for scholarships, but only to scholarship granting organizations (SGOs) in states that have already opted in.
The credit, Section 25F of the tax code, works in two steps. A donor gives cash to a Scholarship Granting Organization (SGO) in a state that has opted in, and the SGO awards scholarships to eligible students for K-12 expenses like tuition, tutoring, and special education services. When the donor files their federal return the following spring, they claim a credit for the gift, dollar for dollar, up to $1,700. The credit is nonrefundable, so the eligibility test for a donor is short: they need to owe federal income tax in the year they give, wherever they live.
To illustrate, perhaps an example is helpful. I live in Indiana, where our Governor has already opted for the first year of the EFTC, and have four school age children. My parents, however, live in California, which has yet to opt in. Because Indiana is among those states leading on providing this opportunity to K-12 students, the school my kids attend is already affiliated with an SGO and is enthusiastic about the new opportunities for fundraising with the EFTC come January 2027. I can tell you right now – I know that grandma and grandpa will also be enthusiastic about making a donation to our Indiana-based SGO and receiving a dollar for dollar tax credit. For states like California, Illinois, Pennsylvania, and Michigan, not opting in will mean their donors remain eligible but their students don’t. Potentially hundreds of millions of dollars could leave these states to fund scholarships in other states as a result.
Three of every four filers can give
In my report, to count the eligible donors, I use recently released IRS Statistics of Income data and data on a sample of U.S. residents from the Census Bureau’s American Community Survey to simulate each filers federal tax liability. For each of these 1.7 million filers, I project out to the 2027 tax year and estimate their federal tax return under current law, which takes into account things like the standard deduction, tax brackets, and existing credits, which all affect how much federal liability each tax unit has. At the end of this process, anyone who still owes federal income tax is an eligible donor.
That describes 121.5 million of the 163.9 million returns I project for 2027. That means, of every four people who file a federal income tax return, three can give to an SGO and claim the credit. About 100 million tax filers will owe at least $1,700 in 2027. Another 21 million owe less than that and can claim a credit up to their tax bill, which averages about $800. If every eligible donor gave the maximum the credit allows, the total at that theoretical 100% participation rate would be $187.9 billion a year.
Half of the eligible donors earn less than $85,000
The most widely cited prior estimate, from Education Reform Now (ERN), counted only filers with incomes above $85,000, since those filers reliably owe at least $1,700, and so their analysis arrived at 47 million donors. While this was an incredibly helpful, early estimate of what could be raised under the EFTC, it inadvertently left out many eligible donors from the pool and was based on IRS data from 2022. Using newly released 2023 IRS data adjusted for 2027 dollars and tax brackets, I find that about 61 million eligible donors earn less than $85,000, and two-thirds of them will owe at least $1,700 in federal income tax in 2027. Together these sub-$85,000 donors hold nearly half of the giving capacity, close to $86 billion, with an average maximum gift of about $1,400. The inclusion of this half of the donor pool in addition to updating for income growth and inflation since 2022 help explain why my fundraising estimates are more than two times larger than ERN’s.
EFTC participation scenarios
The share of eligible donors who will actually participate is the single largest remaining unknown. State tax credit scholarship programs typically have participation rates of one to three percent of taxpayers, but there is good reason to believe that the federal tax credit for education, over time, will surpass that state level average. Instead of making a specific prediction, I report the numbers for a variety of scenarios and allow the reader to decide what they think is plausible.
The potential scale, even at relatively modest levels of participation, is massive. At 10 percent, the credit would raise enough to fund about 3.8 million $5,000 scholarships for students every year. At 20 percent, the total would exceed what the federal government spends on Title I and IDEA, the special education law, combined.
I expect participation from eligible donors under the EFTC to run above the state tax credits scholarship average for four reasons: state credits carry aggregate caps (whereas the federal credit has no cap), the EFTC reaches every filer in every state (which further helps with donor awareness), it can fund scholarships for public and private school students, and the typical filer owes far more federal tax than state tax, and so a much larger share of the population can give a $1,700 gift and receive the full credit.
Where the donors and the students live
As of September, 31 states have opted in or signaled that they will. Those states hold 68.3 million eligible donors and about 56 percent of the national giving capacity. The 20 jurisdictions that have not, including the District of Columbia, hold 53 million eligible donors, $83 billion in giving capacity, and 20.8 million scholarship-eligible children. About two-thirds of both the dollars and the students in the not-yet opted in states are located in just six states: California, Illinois, Pennsylvania, New Jersey, Michigan, and Washington.
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The opt in decision means something different for those two groups. A donor in a state that has not opted in can still give to an SGO in a state that has, and claim the same credit. A child in that same state, however, cannot receive a scholarship funded by EFTC eligible donations. California alone holds $22.5 billion in giving capacity, the most of any state. At 10 percent taxpayer participation, the funding raised would equal about $2.3 billion a year. Unfortunately, the 5.9 million scholarship eligible K-12 students in California currently have no path to receive a scholarship in 2027 as of now. What I can say with certainty is that those dollars will leave the state – to either the federal Treasury as taxes or to scholarship organizations in one of the 31 states that has opted in.
Every taxpaying American can give: sixty-five dollars per bi-weekly paycheck
A significant challenge to increasing donor participation rates is finding a way for the average taxpayer – those making around $85,000 a year – to be able to make the full $1,700 donation. Most middle-income families do not have the spare cash to make such a large donation and then wait for tax filing season in the spring of 2028 to receive their dollar-for-dollar refund. For the 61 million eligible donors earning under $85,000, carrying $1,700 for most of a year is a real obstacle.
Existing withholding rules offer a path for these eligible donors to give in a cash-flow neutral way. Form W-4 lets an employee reduce withholding for tax credits they expect to claim, and the Treasury regulation behind it counts any credit allowable under Chapter 1 of the tax code, which is where Section 25F is located in federal law. If a full-credit donor were to update their W-4 in January to account for EFTC credit, they could decrease their withholding by about $65 paycheck every two weeks and concurrently set up a recurring donation of $65 to an SGO. Twenty-six paychecks later, the donor’s total gift for the year will have grown to $1,700, and they will have done so in a way that does not change their take home pay.
Arizona has run an employer version of this for its own scholarship credits since 2010, with the employer reducing withholding and sending that amount directly to the organization the employee designates. If payroll processors built the same path for the federal credit, I believe that eligible donor participation could run well above what we’ve come to expect based on our experience of state tax credit programs.
What these numbers can and cannot tell us
Overall, this new donor eligibility report estimates the total donor capacity under the EFTC. In contrast to previous estimates, I find a much higher, theoretical upper bound of $187.9 billion by including the full universe of tax filers and project forward to tax year 2027. I also include several robustness checks, which change these estimates based upon an added affordability assumption which caps gifts at two percent of a donor’s income, which is roughly what households give to charity each year (currently). Under this scenario, total donor capacity falls to $160 billion and the 10 percent participation scenario decreases to $16 billion raised. Regardless of which upper bound estimate you choose, both remain theoretical ceilings.
There is the possibility, however, of the Treasury ruling that couples who are married and filing jointly could give more. The statute caps the credit at $1,700 per taxpayer and says nothing about doubling it for married couples, and so my report assumes that $1,700 is the max credit possible per joint return. However, Treasury’s proposed regulations, which are expected by the end of September, may change the interpretation. If they were to allow $3,400 per joint return, national capacity rises by about $75 billion, or an additional $3.8 billion for every additional five percent of taxpayer participation.
So who can fund a scholarship? Nearly everyone who pays federal income tax, in every state, at nearly every income level. What that pool produces depends on how many of them give, and on which states have opted in when the first EFTC eligible gifts are made in January.
The full report, Who Can Fund a Scholarship? Updated Donor Estimates under the New Federal Education Freedom Tax Credit (EFTC), can be found here.
Download the full report or download the two-page summary.
Any taxpayer who owes federal income tax for the year of the gift. The donor gives cash to a scholarship granting organization in a state that has opted in, then claims a dollar-for-dollar credit of up to $1,700 on their federal return the following spring. For 2027, I estimate 121.5 million filers meet that test.
Yes. Opting in governs where SGOs can accept credit-eligible gifts and where scholarships are awarded, not who may give. A donor in any state can give to an SGO in a participating state and claim the credit. Students in a state that has not opted in cannot receive an EFTC scholarship until it does.
You can still give and claim a credit up to what you owe. The credit is nonrefundable, so it cannot produce a refund beyond your tax bill. Any unused credit carries forward for up to five years. About 21 million eligible donors are in this position, with an average available credit of about $800.
The statute caps the credit at $1,700 and contains no provision doubling it for joint returns. Treasury's guidance so far describes the credit only as "up to $1,700." My estimates assume $1,700 per joint return. Proposed regulations expected by the end of September 2026 may resolve this.
No. A gift claimed for the credit cannot also be deducted as a charitable contribution. The credit reduces what you owe dollar for dollar, which for most donors is worth far more than a deduction of the same gift.
No. Federal law requires the SGO, not the donor, to award scholarships. A donor may designate the school where the funds are used, but the SGO decides which students receive scholarships and in what amounts.
Form W-4 lets an employee account for tax credits they expect to claim, which reduces the tax withheld from each paycheck. A donor expecting to claim the full credit could reduce withholding by about $65 per biweekly paycheck and give the same amount to an SGO each pay period. Treasury has not yet addressed the credit specifically in its withholding guidance, so check with a tax professional before changing your withholding.
