As Pennsylvania students return, federal school choice tax credit still uncertain

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The Center Square) – As Pennsylvania students head back to school, the state remains on the sidelines of a new federal program that could expand education choices and funding options for students and their families. 

Thirty-one states have opted in or announced plans to participate so far, while Gov. Josh Shapiro has said his administration is waiting for more detailed guidance before deciding whether Pennsylvania will participate. The Treasury Department and IRS expect to issue proposed regulations by the end of September. 

In the meantime, the Commonwealth Foundation hosted a briefing on the upcoming Federal Scholarship Tax Credit Program, or FSTC, outlining the core mechanics and its potential impact on Pennsylvania.

“Back to school is a hopeful time for families and students but also for policymakers,” said Rachel Langan, the organization’s senior education policy analyst. “The back-to-school season reminds us that the policies passed by lawmakers have an impact on kids and schools across Pennsylvania.” 

Langan said that thanks to the success of existing programs like the Educational Improvement Tax Credit and Opportunity Scholarship Tax Credit scholarships, over 100,000 K-12 students will start the new year at the school that best serves their needs. 

She added that if the governor opts the commonwealth in to the program, “an estimated $500 million in educational scholarship dollars could flow into our state starting in 2027, with up to 89 percent of Pennsylvania kids eligible!”

During the briefing, Langan characterized the FSTC as a tax credit scholarship designed to empower parents with choice, rather than a voucher program. She noted it relies on private contributions to Scholarship Granting Organizations, or SGOs, rather than drawing from the state education appropriation. She also explained the difference between it and existing programs. 

The FSTC is a federal income tax credit of up to $1,700 for qualifying contributions by individual donors. By contrast, she said Pennsylvania’s EITC is a state tax credit program that includes business participation and operates under an annual funding cap, while the federal program does not have a comparable statewide cap on total contributions. 

The most recent data cited by the foundation says that EITC and OSTC scholarships averaged about $2,776 per student in 2023-2024. The value of an FSTC scholarship would vary widely depending on how many donors and applicants a given SGO has. 

For public school families who love their school, Langan said scholarships can be used for educational enrichment. The program will also provide tuition relief for families struggling to afford private school tuition, and for kids trapped in Pennsylvania’s underperforming schools, the scholarships can be used for tutoring or to help cover learning support.

The program would also cover expenses such as transportation costs, supplemental activities, special education expenses, in-person or virtual tutoring, and education technology costs. 

Langan highlighted eligibility and accountability components of the program. 

She said eligibility for students is based on up to 300% of area median gross income, based on Housing and Urban Development guidelines. In Pennsylvania, this ranges from approximately $200,000 in Forest County – the lowest income bracket – to $358,000 in the highest bracket in the southeastern part of the state. Within that ceiling, each SGO can set more defined rules.

SGOs must be listed by the state, reported to the IRS, and serve at least 10 students attending more than one school. They must spend 90% of funds on scholarships, with a maximum of 10% allowed for other expenses. 

In practice, Langan said, many existing EITC/OSTC scholarship organizations already meet most of these criteria and would simply translate into SGOs with some administrative tweaks that include creating separate accounting buckets. 

The money flows from individual donors to state-approved SGOs, not to families or schools directly. The SGO applies the funds as scholarships, paying providers – schools, tutors, after-school programs, etc. – on behalf of eligible students. Families apply to an SGO, have their income and eligibility verified, and get credited on their account, she said.

Langan noted that in Pennsylvania, about 75% of K-12 students attend a public school, making it a good fit for them. Others, though, may need different educational opportunities, she said, and this program could help families access them. 

“This is actually a very expansive program,” Langan said. “And because 89% of Pennsylvania kids are financially eligible, it really does open up so many possibilities for almost every learner in the state.” 

The program begins in January 2027, with Langan saying some funds could become available during the 2027-2028 school year, though she does not expect the program to fully hit its stride until the 2029 school year.

If the governor does not opt in, residents could still claim the credit by contributing to an eligible SGO in a participating state, but those contributions would fund scholarships in that state rather than in Pennsylvania. 

Shapiro’s delay has prompted a bipartisan group of state lawmakers to propose legislation that would require the state’s participation.