How to start a Scholarship Granting Organization (SGO) under the EFTC

TL;DR

• An SGO is a 501(c)(3) public charity (not a private foundation) that takes EFTC donations and awards K–12 scholarships.
• Federal law (§25F) sets hard requirements: serve 10+ students at more than one school, spend ≥90% of income on scholarships, keep contributions in separate accounts, verify income, follow renewal/sibling priority, and never earmark or self-deal.
• You can only operate in a state that has opted in and included you on its annual list to the U.S. Treasury.
• The binding constraint is the 10% administrative cap. Build lean, automate verification and disbursement, and plan donor operations carefully.
• The program launches January 1, 2027 — the organizations that are ready early will capture the first wave of donor giving.

What it takes to be an SGO

A Scholarship Granting Organization is the operational engine of the Education Freedom Tax Credit (EFTC), the federal program also known as ECCA, the Federal Scholarship Tax Credit (FSTC), and IRC §25F. Donors give to an SGO and claim the federal credit; the SGO turns those dollars into scholarships for income-eligible K–12 students. If you’re new to the program, start with our guide to what an SGO is. This article is the how-to.

Section 25F(c)(5) and (d) spell out what an organization must be and do. Before you incorporate anything, make sure your model can satisfy all of it:

• A 501(c)(3) exempt under 501(a) that is not a private foundation.
• Scholarships to 10 or more students who do not all attend the same school.
• At least 90% of income spent on scholarships for eligible students.
• Scholarships used only for qualified K–12 education expenses (the §530(b)(3)(A) list).
• Separate accounts that prevent co-mingling of qualified contributions with other funds.
• Award priority for prior-year recipients, then their siblings.
• No earmarking for a particular student and no self-dealing (no awards to disqualified persons).
• Income verification confirming each household is at or below 300% of area median gross income.

1. Form a nonprofit and get 501(c)(3) status

Incorporate as a nonprofit in your state, adopt bylaws and a conflict-of-interest policy, seat a board, and file IRS Form 1023 (or 1023-EZ if eligible) for recognition of exemption under 501(c)(3). Confirm your determination places you as a public charity, not a private foundation — §25F disqualifies private foundations outright.

2. Build for the 90/10 rule

Section 25F(d)(1)(B) requires that at least 90% of the organization’s income go to scholarships for eligible students. Note the word: income, not donations. That leaves no more than 10% for salaries, verification, audits, fundraising, donor stewardship, technology, and reporting combined. It is one of the strictest pass-through standards in the nonprofit world.

Practically, this means you cannot run an SGO on manual processes at scale. The organizations that survive inside the cap automate the repetitive, high-volume work: income verification, award decisions, disbursement to schools, and per-donor §25F receipts. We cover the cap in depth in the 90/10 rule and compliance guide.

3. Set up separate accounts

Section 25F(c)(5)(B) requires an SGO to prevent co-mingling of qualified contributions by maintaining one or more separate accounts used exclusively for those contributions. Set this up with your bank and accounting system from day one — retrofitting clean fund segregation after money starts moving is painful and audit-risky. Your chart of accounts should make it trivial to show that credited donations flowed only into qualifying scholarships.

4. Design eligibility and award processes

Eligibility

Only eligible students may receive scholarships: a member of a household at or below 300% of area median gross income (the AMGI figure used in IRC §42) for the prior calendar year, who is eligible to enroll in a public elementary or secondary school. You must verify household income and family size and limit awards accordingly. See scholarship eligibility for the family-facing details.

Award priority

Section 25F(d)(1)(D) sets a required priority order: first, students you awarded the previous school year; then, their siblings. Build this into your award engine so renewals and sibling links are handled before new awards.

Anti-earmarking and self-dealing

Donors cannot designate a specific student, and you cannot award scholarships to disqualified persons (determined under rules similar to IRC §4946 — substantial contributors, officers, directors, and their families). Both rules protect the integrity of the program and both are easy to violate accidentally without controls.

5. Get on your state’s list

An SGO can only operate in a covered State — one that has elected to participate and included your organization on the list it submits to the U.S. Treasury. The election is made by the governor (or a state-designated authority), and states can pre-commit for 2027 via the advance election under Rev. Proc. 2026-6.

1. Confirm your state is participating. Check the state-by-state status map. No participation means no SGOs designated there.
2. Learn your state’s certification process. Many states layer their own application, oversight, and reporting rules on top of the federal requirements.
3. Apply to be listed. Demonstrate your 501(c)(3) status, separate accounts, and capacity to meet §25F(d).
4. Stay listed. Participation is annual — the state re-submits its list each year, so compliance is continuous, not one-time.

For the mechanics of how states opt in, read how states opt in.

6. Stand up donor operations

Even with a federal credit attached, donors don’t appear automatically. You’ll need to:

• Accept cash contributions (the credit is for cash only) and verify donor identity.
• Issue substantiation donors can use to claim the §25F credit on their federal return.
• Track the no-double-benefit rule: a credited contribution cannot also be claimed as a §170 charitable deduction, and the federal credit is reduced by any state credit for the same gift.
• Steward donors — all within the 10% cap, so keep fundraising efficient.

A realistic timeline

1. Now → mid-2026: incorporate, file for 501(c)(3), seat your board, and design operations against §25F(d).
2. Through 2026: set up separate accounts, choose your technology, and apply to your state to be listed (confirm the state has elected to participate).
3. Late 2026: finalize donor and family workflows; be ready to issue receipts and accept applications.
4. January 1, 2027: the credit goes live — donations made on or after this date can generate the federal credit.

See the full EFTC timeline and key dates.

Frequently asked questions