What Is a Scholarship Granting Organization?

A Scholarship Granting Organization is a nonprofit that raises money from individual donors and uses it to award scholarships to income-eligible students for qualified educational expenses. The organization sits between the donor and the student: it receives donations, verifies that students qualify, makes scholarship award decisions through an independent process, and disburses funds to cover qualified expenses.

What makes an SGO under Section 25F different from an ordinary scholarship nonprofit is the federal tax credit attached to donations. Donors who contribute to a qualifying SGO receive a non-refundable federal income tax credit of up to $1,700 per year ($3,400 for married couples filing jointly). The credit directly reduces the donor's federal tax liability — dollar for dollar — rather than merely reducing taxable income as a deduction would.

This distinction matters enormously for donor economics. A charitable deduction at a 24% tax bracket reduces a donor's taxes by 24 cents per dollar donated. A tax credit reduces taxes by a full dollar per dollar credited. At the $1,700 maximum, a donor in any tax bracket receives the same $1,700 reduction in federal taxes owed.

Any organization that meets the federal structural requirements and is approved by a state that has opted into the program can operate as an SGO. In practice, the organizations forming SGOs fall into a few common categories:

Dioceses and Catholic school networks that want to fund scholarships across their school network. These organizations have existing donor relationships built on decades of parish giving, and they serve a defined community with strong affinity.

Evangelical churches and faith-based nonprofits that want to fund scholarships for students at schools aligned with their mission, or for students participating in qualifying educational enrichment programs.

Private school consortiums — groups of independent schools that pool administrative resources to create a shared SGO rather than each running their own.

Community foundations and civic nonprofits focused on income-eligible students in specific geographic communities, often urban neighborhoods or rural areas with concentrated educational need.

Public school–adjacent nonprofits that want to use the program's allowance for qualifying enrichment programs — tutoring, academic enrichment, and supplemental educational materials — to serve public school students.

Students are eligible for scholarships from an SGO if their household income is at or below 300% of the area median gross income for the area where they live. Area median income is a geographic figure — it varies significantly between a high-cost metropolitan area and a rural county. A household income that falls within the 300% threshold in rural Mississippi may not qualify in metropolitan California.

The income calculation is based on the household's total gross income from all sources. The verification process requires that the SGO collect documentation supporting the income claim before making an award.

Beyond income eligibility, the statute creates a priority system for award decisions. Students who received a scholarship in a prior year — returning scholarship recipients — are prioritized in subsequent award cycles. Siblings of current or prior scholarship recipients receive the same priority.

Section 25F defines qualified expenses by reference to the Coverdell Education Savings Account expense categories under Section 530(b)(4) of the IRC. These categories include:

• Tuition and fees at qualifying educational institutions (private K-12 schools, home study programs, and qualifying public school supplemental programs)
• Academic tutoring provided by a tutor or tutoring organization
• Books, supplies, and equipment required for enrollment or attendance
• Educational software and online programs for academic instruction
• Special needs services for students requiring individualized educational support

These categories apply in both private school and public school contexts, though the application in public school contexts requires careful analysis of which expenses are genuinely supplemental versus ordinary school expenses.

The Section 25F program looks simple in outline: donors give, students receive scholarships. The compliance requirements that make it operationally complex are the conditions attached to each step.

The no-earmarking rule means that donors cannot direct their contributions to specific students or specific schools. In faith community contexts — where a parishioner might expect their giving to benefit their parish school — this creates real tension between donor expectations and federal compliance requirements.

The arm's-length award process means that scholarship decisions must be made by an independent process that cannot be influenced by donor preferences. This requires documented committee processes, independence between award decision-makers and donor relationships, and distribution of scholarships across multiple schools.

The 90/10 spending ratio means that at least 90% of the SGO's annual revenues must be spent on qualified scholarships, leaving a maximum of 10% for administrative and fundraising costs. For small or early-stage programs, this constraint is real and requires deliberate planning.

State approval means that the SGO must be formally approved by a state that has opted into the program. Without state approval, no donor in that state can claim the federal tax credit.

IRS-compliant tax credit receipts are different from standard charitable contribution receipts. The specific information required on a Section 25F receipt has not yet been fully specified in IRS guidance, which means SGOs need to design their receipt systems based on the statutory language and update them as guidance issues.