The SGO glossary

Scholarship Granting Organization (SGO)

A 501(c)(3) nonprofit that accepts donations from individual taxpayers and awards those funds as scholarships to income-eligible K-12 students. Under Section 25F, donors to a state-approved SGO receive a dollar-for-dollar federal income tax credit. An SGO sits between donor and student: it receives contributions, verifies student eligibility, makes award decisions through an independent process, and disburses funds for qualified expenses.

Section 25F

The section of the Internal Revenue Code, enacted as part of the One Big Beautiful Bill Act, that creates the federal scholarship tax credit. It defines the donor credit, the structural requirements SGOs must meet, student income eligibility, and the state opt-in mechanism. The program takes effect January 1, 2027, and the IRS has not yet issued final regulations.

One Big Beautiful Bill Act (OBBBA)

The federal legislation that enacted Section 25F, creating the first nationwide scholarship tax credit program. Before the OBBBA, tax-credit scholarship programs existed only at the state level, in states such as Arizona, Pennsylvania, and Florida.

Federal scholarship tax credit

The non-refundable federal income tax credit donors receive for contributions to a state-approved SGO: up to $1,700 per year per taxpayer, or $3,400 for married couples filing jointly. The credit reduces federal tax liability dollar-for-dollar, unlike a deduction, which only reduces taxable income.

Tax credit vs. tax deduction

A deduction reduces taxable income, so its value depends on the donor's tax bracket — a 24%-bracket donor saves 24 cents per dollar deducted. A credit reduces taxes owed directly: one dollar of credit is one dollar less tax. At the $1,700 Section 25F maximum, a donor in any bracket receives the same $1,700 reduction in federal taxes owed.

State opt-in

The mechanism by which the Section 25F program activates in a state. A state must enact qualifying opt-in legislation before its residents' contributions can earn the federal credit. Without opt-in, no SGO can be approved in that state regardless of how well-structured it is federally.

State approval

The formal approval an SGO must receive from an opted-in state before donors can claim the federal credit for contributions to it. Approval processes vary by state — many run through the state Department of Revenue or Department of Education, with typical timelines of four to eight weeks where processes are established.

No-earmarking rule

The federal prohibition on donors directing their contributions to specific students, schools, or communities. It covers direct earmarking (naming a student), structural earmarking (allocating funds by school in proportion to each school community's donations), and implicit conditioning (informal understandings about who will benefit). Award decisions must be genuinely independent of donor identity and preferences.

Arm's-length award process

The requirement that scholarship decisions be made through an independent, documented process insulated from donor influence — typically an award committee with documented criteria, independence between decision-makers and donor relationships, and distribution of awards across multiple schools.

90/10 rule

Also: 90/10 spending requirement

The requirement that at least 90% of an SGO's annual revenues be spent on qualified scholarships, leaving at most 10% for all administrative and fundraising costs combined. The ratio is tested against each year's revenues independently — a shortfall in one year cannot be made up in the next, and violations can lead to state suspension or revocation of approved status.

300% of area median income (AMI)

The student eligibility ceiling: a student qualifies for SGO scholarships if household gross income is at or below 300% of the area median gross income where they live. Because AMI is geographic, the threshold differs significantly between high-cost metros and rural counties — the same household income may qualify in one area and not another.

Qualified expenses

What SGO scholarships may pay for. Section 25F adopts the Coverdell Education Savings Account categories under IRC §530(b)(4): tuition and fees at qualifying institutions, academic tutoring, books, supplies, and equipment required for enrollment, educational software for academic instruction, and special needs services.

Multi-student, multi-school distribution requirement

The structural requirement that an SGO award scholarships to ten or more students who do not all attend the same school, per award cycle. Nine awards fall short of the numerical minimum; ten awards concentrated at a single school violate the distribution component even though the count is met.

Primary mission test

The requirement that an SGO be a 501(c)(3) organized and operated with a primary mission of providing scholarships to eligible students. A broad educational mission — 'promoting education in the community' — may not qualify without amending governing documents; the IRS looks at both documents and actual operations.

Returning-student priority

Also: Sibling priority

The statutory priority system for award decisions: students who received a scholarship in a prior year are prioritized in subsequent cycles, and siblings of current or prior recipients receive the same priority.

Direct-to-school ACH disbursement

A scholarship disbursement channel in which the SGO pays tuition directly to the school by bank transfer. Because funds never pass through the family, no receipt collection is needed — making it the cleanest channel for tuition from a compliance standpoint.

Restricted prepaid card

Also: MCC-controlled card

A disbursement channel for non-tuition qualified expenses such as books, tutoring, and supplies. The card is restricted by merchant category code, so transactions at non-qualifying merchants are declined automatically and every purchase is logged in real time.

Reimbursement with receipt verification

A disbursement channel in which families pay for a qualified expense and are reimbursed by ACH after submitting a receipt that is verified against the SGO's scholarship use policy. Used for edge-case expenses the other channels don't cover; receipt collection at scale is the most common failure mode in unstructured scholarship programs.

Education Savings Account (ESA)

A state school-choice mechanism in which the state deposits public funds into accounts parents control and spend on approved educational expenses. Distinct from the SGO model, which is funded by private donations incentivized through tax credits rather than direct state appropriations.

School voucher

A state program that pays public funds directly toward private school tuition for eligible students. Unlike vouchers, the Section 25F model routes private donations through nonprofit SGOs, with donors compensated by a federal tax credit.

Tax-credit scholarship program

The general model — predating Section 25F at the state level — in which donors receive tax credits for contributions to scholarship organizations. State programs such as Pennsylvania's EITC/OSTC and Arizona's individual credit programs built the infrastructure many states are now adapting for the federal program.

SGO compliance calendar

The recurring set of obligations an operating SGO must track: real-time controls (earmarking screens, credit-cap enforcement), monthly reconciliation, quarterly 90/10 monitoring, and annual state reporting. Missing a state reporting deadline can jeopardize approved status.