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#AskExcelinEd: What are 5 key considerations for creating or developing tax-credit scholarship programs?

• James Paul

As we continue to celebrate National School Choice Week, Associate Policy Director of Education Choice James Paul helps us better understand one of the fastest growing areas of choice – tax-credit scholarship programs.

A proper celebration of National School Choice Week must include the life-changing opportunities that tax-credit scholarship programs are offering to hundreds of thousands of families across 18 states. Illinois is the most recent state to pass a tax-credit program—and in the past decade alone, 15 tax-credit scholarship programs have been established nationwide.

Tax-credit scholarships allow businesses and individuals to receive full or partial state tax credits when they donate to nonprofits that provide scholarships to eligible children. If you are thinking about creating a new tax-credit program in your home state, here are five considerations to keep front of mind.

  1.  Determine the students who will be served by the program.
    Regardless of family income or unique circumstances, all children deserve access to educational opportunity. However, if the conditions in your state favor a targeted program, consider serving students with the greatest needs. Often this may be students with special needs or students from families with limited incomes.
  2. Size matters when it comes to the program cap and scholarship amounts.
    Tax-credit scholarship programs often include a maximum number of credits that may be awarded annually. The larger the cap, the more scholarships can be distributed to children. Program caps vary across states. For example, Rhode Island’s program is capped at $1.5 million, while the Florida Tax Credit Scholarship Program has a cap of nearly $700 million. Some programs, like Florida’s, are designed with cap escalators, which allow businesses and individuals to donate more money to match parent demand. States with escalators have seen steady program growth, while other states’ programs have remained flat-funded for several years.Policymakers also must decide whether scholarship amounts are set by the state or by scholarship-granting organizations (SGOs). Setting a fixed scholarship amount for all participants increases transparency and typically results in larger scholarships, but it may restrict flexibility and prevent SGOs from customizing scholarship awards based on the unique needs of their applicant pool. On the other hand, allowing SGOs to determine scholarship amounts (based on varied student need) will distribute limited funding across more children, although some students will receive less-generous scholarships.
  3. Scholarship-granting organizations can be parent-driven or mission-specific.
    There are two ways to organize scholarship organizations: make them either parent-driven or mission-specific. Parent-driven SGOs award scholarships to parents who can take the scholarship to any eligible private school in the state. Mission-specific SGOs provide scholarships to a limited network of participating schools (e.g., Montessori schools or Catholic schools in one geographic area).A child with a scholarship from a parent-driven SGO may attend any participating school in the state. Should a parent decide that a different school is more suitable to their child’s needs, parent-driven SGOs often provide more flexible educational options. Alternatively, mission-specific SGOs provide scholarships to schools that align with the SGO’s mission, such as a specific religion or educational approach. Mission-driven SGOs allow scholarship administration to be organized around common objectives. This may lead to greater fundraising capacity, but it can also limit choices for parents.
  4. Be thoughtful about sensible requirements for participating schools and SGOs.
    Tax-credit scholarship programs should provide for the well-being of students while also respecting private school autonomy. As such, participating schools must ensure the health, safety and welfare of the children they serve. Additionally, schools should demonstrate financial controls to protect against fraud.Likewise, it is reasonable to require that SGOs allocate no more than 10 percent of their tax-credit contributions to administrative expenses – a common standard for nonprofit organizations. And there should be penalties for non-compliance: Participating schools and SGOs that violate the state’s tax-credit scholarship law should be barred from participation in the program.
  5. Academic accountability can be a thorny subject, but it’s essential to get this right.
    Above all else, participating schools should regularly report to parents on their child’s academic progress. Because these programs are funded through private donations, some state tax-credit scholarship programs do not include formal testing mandates. Other states help parents access the information they need to make decisions about schools by requiring that schools assess participating students using their choice of a state test or a norm-referenced test. This approach tends to strike a fair balance between autonomy and accountability.

Tax-credit scholarships are a lifeline for many children who would otherwise not have the means to access the school best-suited to their needs. Thoughtful policy design can help provide more families with life-changing scholarships—and true educational opportunity.

About the author

James Paul

James Paul is an Associate Policy Director who focuses on expanding opportunity through private education choice. In this role, James provides analysis and support to state partners regarding the design and implementation of tax-credit scholarship and education savings account programs. Prior to joining ExcelinEd, James was a Policy Analyst at the Commonwealth Foundation in Harrisburg, Pennsylvania, where he worked on a variety of state education issues. James graduated from Syracuse University and resides in the Washington, D.C. area.