What is a Scholarship Granting Organization?

The federal pathway, at a glance

How does an SGO fit into Section 25F?

SGOs connect donors with students: a donor contributes to the organization, the SGO independently reviews eligibility and awards scholarships, and funds pay for permitted education expenses through the applicable school or provider process. A qualified Section 25F contribution cannot be earmarked for an individual student.

A federal credit beginning in 2027

Section 25F creates a nonrefundable federal income tax credit of up to $1,700 per eligible individual taxpayer for qualified cash contributions beginning January 1, 2027. It is a donor tax benefit, not a $1,700 limit on a student's scholarship. Explore the federal credit and donor examples.

State participation and nonprofit status both matter

For this federal pathway, an SGO must be a tax-exempt 501(c)(3) organization that is not a private foundation, satisfy the federal SGO requirements and appear on the participating state's list for the applicable year. A state's election to participate does not approve every nonprofit. Existing state scholarship programs may have different rules. Check your state's participation and requirements; see how an existing nonprofit can explore becoming an SGO.

Scholarships come first: the 90% requirement

The statute requires spending at least 90% of income on scholarships for eligible students. This is more specific than a general promise to keep overhead low. October's proposed regulations address how spending is measured and timed. Read the 90% rule and the proposed measurement details.

Eligible students and qualified education uses

The statutory baseline covers students eligible to enroll in public elementary or secondary school whose prior-calendar-year household income is no more than 300% of applicable area median gross income. Scholarships fund qualifying K–12 expenses, potentially including tuition, tutoring, special-needs services, books and supplies; not every student or educational purchase qualifies. Explore student eligibility and education-expense requirements.

Sources: IRS Federal Scholarship Tax Credit overview and Public Law 119-21, §70411 / IRC §25F. The October 2026 update distinguishes statutory requirements, temporary procedures and proposed operating details. Proposals are not final regulations.

Patterns, not universal rules

Common SGO Characteristics

Many SGOs operate as 501(c)(3) nonprofit organizations. Forming a nonprofit under state law and obtaining federal tax-exempt status are separate matters. The IRS explains the preparation process.

• State approval, certification, registration, or listing may be required.
• Donation substantiation and documentation are important. IRS guidance describes federal contribution documentation concepts.
• Scholarship disbursement must be tracked and student eligibility records retained under the applicable program's requirements.
• Transparent operational and compliance controls support accountability.
• State-specific rules may define allowable administrative expenses or required scholarship distribution percentages.

These are common patterns, not a claim that every jurisdiction imposes the same obligations. Use the official program guidance for your organization and the applicable reporting period.