Federal Scholarship Tax Credit: Six States Block K-12 Aid; Four of Them Fund College Scholarships for Undocumented Students

ANALYSIS · October 23, 2026

Slug: federal-scholarship-tax-credit-state-blocks

Package note: This Analysis covers the Federal Scholarship Tax Credit (FSTC) under IRC §25F — a federal donor tax credit for K–12 scholarships in participating states — and compares that record to state-funded college aid rules in the six states that have so far vetoed or declined FSTC participation. The programs are not the same. The irony is in the policy contrast, not a claim that FSTC itself awards aid based on immigration status.

Primary sources

Federal Scholarship Tax Credit (K–12)

  • IRS, Federal Scholarship Tax Credit (FSTC) program page: https://www.irs.gov/government-entities/federal-state-local-governments/federal-scholarship-tax-credit-fstc
  • Federal Register, temporary regulations, Federal Scholarship Tax Credit (Oct. 2, 2026): https://www.federalregister.gov/documents/2026/10/02/2026-20264/federal-scholarship-tax-credit
  • CEN SGO state-by-state participation tracker (as of Oct. 1, 2026; cross-checked to IRS count): https://censgo.org/states/
  • NCEA public-policy summary of FSTC state status (as of Oct. 9, 2026): https://ncea.org/NCEA/NCEA/What_We_Do/Public_Policy/NCEA_Public_Policy_Activities.aspx

Governor veto / decline actions

  • Wisconsin Gov. Tony Evers, signed veto message on AB 602 (March 30, 2026): https://content.govdelivery.com/attachments/WIGOV/2026/03/30/file_attachments/3600133/Signed%20Veto%20Message%20-%20AB%20602.pdf
  • Arizona Gov. Katie Hobbs veto of SB 1142 / FSTC opt-in (April 2026 coverage and bill record): https://www.kjzz.org/politics/2026-04-14/hobbs-vetoes-proposal-to-opt-arizona-into-tax-credit-program-to-fund-private-school-scholarships ; LegiScan SB 1142: https://legiscan.com/AZ/bill/SB1142/2026

Illinois (not blocked)

  • Capitol News Illinois, Pritzker “still evaluating” FSTC rules after Oct. 1 Treasury publication (Oct. 12, 2026): https://insider.capitolnewsillinois.com/pritzker-still-evaluating-states-participation-in-federal-school-choice-program/

College aid / residency rules in the six FSTC blockers

  • Arizona Board of Regents, Proposition 308 FAQ (updated 2025/2026): https://www.azregents.edu/sites/default/files/2026-09/proposition-308-faq-9-10-2026-r2.pdf ; University of Arizona Start Now page: https://startnow.arizona.edu/pay-for-college/undocumented-students
  • Minnesota Office of Higher Education, North Star Promise fact sheet (Oct. 2025): https://ohe.mn.gov/sites/default/files/2025-10/NSP_FactSheet_FINAL_Oct25_ADA.pdf ; MN Dream Act application notice: https://content.govdelivery.com/accounts/MNOHE/bulletins/38c5849 ; eligibility chart noting Dream Act applicants: https://ohe.mn.gov/sites/default/files/2025-09/Eligibility%20Requirements%20Chart_MN%20State%20Financial%20Aid%20Programs_ADA.pdf
  • University of New Mexico Financial Aid FAQ (Lottery / Opportunity Scholarships; citizenship not required for state aid): https://unm-student.custhelp.com/app/answers/detail/a_id/3849/~/can-undocumented-students-receive-financial-aid%3F ; NMJC Opportunity Scholarship criteria (“NM resident (does not have to be a U.S. citizen)”): https://www.nmjc.edu/admission/financial_aid/lottery_scholarship.aspx ; NMSU Opportunity Scholarship FAQ: https://hest.nmsu.edu/students/OS-FAQ.pdf
  • Oregon Student Aid, Oregon Opportunity Grant (undocumented / DACA eligible via ORSAA): https://www.oregonstudentaid.gov/grants/oregon-opportunity-grant/ ; DACA / undocumented page: https://www.oregonstudentaid.gov/daca-undocumented-students/
  • Wisconsin Higher Educational Aids Board programs page (state aid via FAFSA; Wisconsin residency): https://heab.state.wi.us/programs.html ; Higher Ed Immigration Portal (Wisconsin classified restrictive; no state financial aid expansion for undocumented students): https://www.higheredimmigrationportal.org/state/wisconsin/

Tax treatment of scholarships (general federal rule)

  • IRC §117 / IRS Publication 970 — qualified scholarships used for tuition and required fees are generally tax-free to the degree candidate: https://www.irs.gov/publications/p970 ; IRS FAQs on grants and scholarships: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/grants-scholarships-student-loans-work-study/grants-scholarships-student-loans-work-study

Core Tension

The Federal Scholarship Tax Credit is a donor credit for cash gifts to Scholarship Granting Organizations that fund elementary and secondary scholarships — but only in states that elect to participate. As of early October 2026, six states have effectively shut their residents out of receiving those K–12 scholarships: Arizona and Wisconsin by governor veto, and Hawaii, Minnesota, New Mexico, and Oregon by decline.

Four of those six — Arizona, Minnesota, New Mexico, and Oregon — at the same time run state-funded college grant or scholarship programs that undocumented students can reach if they meet residency and other rules. That is the documented irony: those states have blocked or rejected a federal K–12 scholarship pathway open to kids in participating states (including legal residents and citizens), while using state money for postsecondary aid that does not require U.S. citizenship.

Wisconsin is in the veto column on FSTC but does not expand state college aid to undocumented students. Hawaii’s post-2025 tuition and aid posture for non-citizens is unsettled enough that this Analysis does not count it among the four.

Illinois is not blocked. Maps and posts that paint Illinois gray as if Gov. JB Pritzker had already refused the program overstate the record. Capitol News Illinois reported on Oct. 12, 2026, that Pritzker is “still evaluating” the Oct. 1 rules. CEN SGO and NCEA both list Illinois under “no decision yet.”

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