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By Jeff Wilson
As of early October, the upcoming Federal Scholarship Tax Credit has its first proposed rulebook, and public-school leaders need to use this time to review the proposal, and help shape the final version. The proposed Section 25F regulations provided by Treasury and the IRS cover major operational questions that schools and Scholarship Granting Organizations have been waiting on, including things such as household-income verification, scholarship payments, audits, SGO requirements, donor credits, and more. However, and perhaps most importantly, these rules are not yet final, and the Treasury is accepting public comments/feedback through the end of November.
This comment period is something that I have been seeing discussed primarily in private school circles, but I think that it ultimately matters more for our public schools. After all, district leaders around the country have been waiting for DC to explain how the program will work, and what we now have provides us with enough details to begin asking a different question. More specifically, will these rules actually work when an actual school, family, SGO, or service provider has to implement them.
One provision that I want to highlight is particularly relevant to public schools. The Treasury has proposed a safe harbor regulation aimed specifically at scholarships supporting individual academic tutoring or certain special-needs services at schools in low-income areas. In particular, if a school is located in a qualified area, or if at least 80 percent of its students live in qualifying areas, students identified on the basis of academic or special need may be treated as meeting the FSTC income requirement. Most importantly, this can be done without the SGO separately collecting the usual household-income information required for verifying eligibility.
Now, this seems like it could actually make accessing FSTC scholarships easier for some families, but it will definitely come with some operational challenges. Under this provision, SGO(s) would need an annual third-party audit covering the safe harbor and verifying things such as how students were selected, whether providers were qualified, whether the need for services was independently diagnosed, and whether the services met appropriate quality standards. Given the range of questions that this provision opens, the Treasury is asking for guidance and feedback as to if there are less burdensome ways for schools and SGOs to provide protections against potential fraud or improper payments.
Personally, I believe that our public school leaders are among those who are best positioned to answer those questions because they understand what documentation schools and school districts collect and maintain on an annual basis, as well as what resources it takes to produce new processes or documentation. A superintendent, special-education administrator, education foundation, or district business office has the experience to identify when a seemingly reasonable request can create an unreasonable burden on families, leaders, or administrators. With that in mind, their practical and lived experience deserves to be taken into consideration as part of the federal record before the regulations are finalized.
In a similar manner, I think this also applies to the proposed scholarship-payment system. Treasury has laid out rules for overseeing processes such as reimbursements, direct scholarship payments to schools and vendors, and how the program will interact with qualified digital wallets. While these details can appear technical when written in a federal regulation, they will directly affect how families experience the program, as well as how much administrative work schools and SGOs will be required to take on.
Beyond that, there are still a number of unanswered questions which will be incredible important to the public school community. Most importantly, Treasury has not yet issued the separate guidance regarding the full boundaries of qualified K-12 expenses. Here at FundEDU, we have been reading these proposed regulations through a very practical lens, and our public school guidance is aimed at helping leaders to look at and understand the provisions which will directly affect their students. After all, a district does not need to submit a multi-page or formal legal brief to make a useful contribution. Even short comments that explain how certain documentation requirements would be difficult to administrate, how families struggle with reimbursement-based programs, or sharing a local alternative process which is already working well can be incredibly valuable. I firmly believe that the people writing these regulations need to hear from people who actually work in the field in order to understand what implementation will look like outside Washington.
Approaching the comment period intentionally also provides an opportunity for public schools to become active participants in the FSTC conversation rather than waiting for a finished program to arrive. Public schools and districts will interact with the FSTC differently from private schools, but their experience with tutoring, special education, family communication, vendors, and federal program administration provides them with something meaningful to contribute right now. After all, while the people writing the regulations understand tax law, school leaders understand implementation, and their school communities. The next several weeks give public schools a critical opportunity to bring that perspective and experience into the FSTC rules conversation, and those with something useful to say should take full advantage of it! If you aren’t sure what to say, or how to say it, please reach out and we at FundEDU would be happy to assist!
