Helping more donors use the Education Freedom Tax Credit

State participation and donor participation

Almost all of the attention on the Education Freedom Tax Credit is political: which states have opted in (30 for 2027 as of August 2026, by Treasury’s count), which are holding out, whether a future Congress might narrow or repeal it. That debate is real and worth following. But it answers a different question than the one that ultimately determines whether scholarships reach kids.

Politics decides the state’s scholarship-listing pathway and generally its resident students’ access to scholarships for that year. Eligible donors may claim the federal credit through an SGO listed in any covered state, regardless of their own state’s participation. State participation does not decide whether available credits get claimed. And on that second question, a dollar-for-dollar federal credit turns out to be surprisingly easy to leave unused. Once a state is in and 2027 arrives, donor participation becomes a practical determinant of how much scholarship funding is available. That is the adoption gap, and it deserves at least as much attention as the political scoreboard.

Why available benefits can go unused

The intuition that a dollar-for-dollar credit will “sell itself” runs straight into the evidence. Writing in Education Next, AEI’s Rick Hess, a supporter of the credit, points to two uncomfortable precedents:

• Employer 401(k) matches. A match is the closest thing to available benefits in personal finance, an instant, immediate employer contribution, subject to the plan’s terms, and yet a large share of eligible workers contribute too little to capture it, or don’t participate at all. The benefit is obvious; the follow-through is not.
• The presidential campaign checkoff. The box on the federal return that directs a few dollars to the presidential campaign fund costs the taxpayer nothing, it doesn’t change your refund or your bill. Participation still fell from roughly 29% in the late 1970s to about 4% in 2020, according to Hess’s cited comparison. Even zero-cost, one-checkbox participation drifts toward zero when people are confused or indifferent.

The lesson isn’t that the §25F credit will fail. It’s that uptake is never automatic, and a credit that asks more of a person than ticking a box, actually donating, keeping a receipt, claiming it on a return, has to earn its participation by removing friction. Hess’s warning is the right one: the enemy of a good tax benefit is the hassle of using it.

Treasury’s own numbers assume the gap

The October 2026 rules put a number on it. Treasury and the IRS estimate that by 2030, more than 11 million taxpayers could give nearly $26 billion a year to SGOs, funding as many as 2.2 million scholarships. The economic analysis in the proposed regulations says those estimates are “produced using a 10% take-up rate.” The official projection, in other words, already assumes most people who could claim the credit won’t. Every point of participation above 10% is scholarship money the projection doesn’t count on, and every point below it is money that doesn’t arrive. (These are Treasury’s estimates, not commitments; see the $26 billion projection.)

Treasury treats take-up as a design problem on the family side too. Its analysis cites research on the “effort costs” of learning that a benefit exists, finding out whether you qualify, and completing the application, and the proposed rules answer with shortcuts: a household that already receives SNAP, TANF, WIC, Section 8 housing, or SSI can document eligibility with a recent award letter, eligible foster children automatically meet the household-income test without income verification, and a safe harbor covers tutoring and special-needs services for students a school selects in low-income areas. With those routes, Treasury estimates about 96% of children in participating states would be eligible. Broad eligibility is the easy part. Getting donors to give and families to apply is the gap.

The four frictions that suppress uptake

Break the “hassle” into its parts and it’s four distinct barriers, each of which quietly removes a slice of would-be participants:

1. Awareness

You can’t claim a credit you’ve never heard of, or one you vaguely associate with “something for private schools that doesn’t apply to me.” Much of the eligible donor pool doesn’t yet know the credit exists, or misunderstands who it’s for. (It is, in fact, open to essentially any taxpayer with $1,700 of federal income tax, and under Treasury’s proposed regulations a married couple filing jointly can claim up to $3,400 when each spouse gives. A donor in a state that hasn’t opted in can still give to an SGO in one that has.)

2. Paperwork and risk

A new line on a tax return reads as a new way to make a mistake. Donors worry about substantiation, about handing an organization sensitive information, about an audit. §25F actually addresses this well: the unique donor number lets the IRS match a claimed credit to a real donor and a real SGO without the donor ever handing over a Social Security number. Treasury’s temporary regulations, which apply from September 1, 2026, set the routine: the SGO sends each donor a written acknowledgment with the donor number by January 31 and reports the donor’s name, address, and annual total to the IRS by February 28. Under the proposed rules, the donor lists the number on Form 8525 (not yet released) and may rely on an organization’s presence on the IRS SGO list at the time of the gift. But the perception of paperwork risk still deters people until the process feels obviously simple.

3. Cash-flow timing

Asking a household to part with $1,700 now and get it back much later is a real ask, even when the donor expects to qualify. This is the friction Hess flags most sharply, and it’s the most fixable of all: a carefully calculated withholding adjustment under ordinary IRS Form W-4 rules lets a donor recover the credit across their 2027 paychecks instead of waiting for a 2028 refund. (Treasury’s October 2026 rules don’t address withholding; the ordinary Form W-4 rules apply.) Withholding can help some donors with timing, but the calculation must reflect their expected liability and actual qualifying gifts.

4. Trust

Giving $1,700 to an organization you’ve never heard of is a leap. People give when a messenger they already trust, their child’s school, their congregation, a community group, vouches for where the money goes. Trust is also where the program is most exposed: a handful of bad-actor SGOs could sour the public on all of them, which is why clean, transparent operators aren’t just nice to have, they’re the thing that protects everyone’s participation.

Practical ways to reduce friction

None of these barriers is a law of nature. Each maps to a concrete, already-available response:

• Awareness → trusted messengers. Institutions families already know can help explain the credit. A short explanation from a school or congregation can make the steps easier to understand. (We keep a shareable community explainer for exactly this.)
• Paperwork → simple platforms and clear receipts. When contributing takes two minutes and the acknowledgment and donor number arrive immediately, donors may feel more confident about keeping the right records. The rules set January 31 of the following year as the deadline for the acknowledgment; an SGO that gives donors their number at the time of the gift removes the wait.
• Cash flow: explain that a donor may review ordinary Form W-4 withholding with a tax adviser. Any adjustment must reflect expected tax liability and completed qualifying gifts; it changes timing, not eligibility.
• Trust → clean, audited SGOs. Transparent books, annual audits, and honest communication turn a stranger into a credible steward, and inoculate the whole program against the reputational risk a few bad actors would otherwise create. The rules now supply part of the scaffolding: Treasury’s proposed regulations require every SGO to file an annual certification and obtain an annual financial and programmatic audit (by an independent outside auditor once receipts top $500,000), the IRS will publish an SGO list that donors may rely on, and a state can remove an SGO that stops qualifying. What the rules can’t supply is the relationship.

Notice the pattern: the fixes aren’t federal legislation or a change in the political weather. They’re operational. They happen at the level of the individual organization asking for the gift.

How SGOs can support participation

The credit’s total impact is just the sum of thousands of small yes-or-no decisions to give. And every one of those decisions is made at a single point in the system: the Scholarship Granting Organization that asks. The SGO is where awareness is created, where the paperwork is either easy or scary, where the donor learns whether they can accelerate the benefit, and where trust is earned or lost. If adoption is the game, the SGO is the field it’s played on.

That’s why the unglamorous work, donor onboarding, instant §25F receipts and donor numbers, clean fund accounting, honest reporting, matters more to the program’s success than most of the political coverage suggests. It’s also the biggest lever an individual operator controls. You can’t change whether your legislature opts in this week. You can absolutely change whether a donor who was going to give finds it effortless or gives up halfway.

What this means for you

• If you’re a donor, start with the qualifying-gift requirements and your expected federal income tax liability. A tax adviser can help assess whether an ordinary Form W-4 withholding adjustment fits your circumstances.
• If you run or advise an SGO: your conversion rate, the share of potential donors who actually follow through, is the number that decides your impact. Treat friction as the enemy.
• If you’re an advocate or journalist: the political scoreboard is only half the story. The other half, quieter and more decisive, is whether the machinery of participation actually works once the credit is live.

Frequently asked questions

Sources and guidance

Sources checked October 19, 2026. Proposed rules and projections are identified in the article. Consult the latest official guidance before acting.

• Education Next
• Proposed regulations
• The $26 billion projection
• Temporary regulations