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.”

What the FSTC actually is

This is not the same program as a state college grant. FSTC scholarships are K–12. State “Dream Act,” Opportunity, Lottery, and similar programs discussed below are postsecondary.

Where states stand (as of early October 2026)

Cross-checked against CEN SGO (Oct. 1, 2026) and NCEA (Oct. 9, 2026):

Truly blocked or declined for local FSTC scholarships so far: AZ, HI, MN, NM, OR, WI.

The Kerpen / Will County map problem (Illinois)

Activist and social posts circulating a gray-state map — including a Will County, Illinois Facebook share tied to Phil Kerpen’s framing that “if you live in one of the gray states, your governor has blocked” the scholarships — treat undecided states as already blocked.

That framing is wrong for Illinois. Pritzker has not filed an opt-in and has not declined. He has said he is still evaluating the rules. Until Illinois elects in (or formally declines), Illinois K–12 students cannot receive FSTC scholarships through an Illinois SGO list — but that is stall / indecision, not a completed block. Collapsing “no decision” into “blocked” overstates the governor’s action.

Four-state contrast: college aid for undocumented students vs. FSTC block

These four states both (1) vetoed or declined FSTC participation and (2) fund college aid that undocumented students can reach under state rules.

Arizona — vetoed FSTC; Prop. 308 opened state college aid

• FSTC: Gov. Katie Hobbs vetoed the legislature’s opt-in (SB 1142) in April 2026.
• College aid: Voters approved Proposition 308 (2022). It restored in-state tuition for qualifying non-citizen students who attended and graduated from Arizona high school (or GED) under set rules, and repealed the old ban on state-funded financial aid for students without lawful immigration status. Arizona Board of Regents FAQ: with Prop. 308, students “regardless of immigration status” may be eligible for state-funded grants, scholarships, and waivers if they meet each program’s other requirements. In-state tuition criteria and state-aid eligibility are related but not identical — the high-school attendance/graduation test is for tuition; state aid eligibility no longer turns on immigration status alone.

Minnesota — declined FSTC; Dream Act feeds North Star Promise

• FSTC: Gov. Tim Walz declined participation (March 24, 2026, per CEN SGO / NCEA trackers).
• College aid: Undocumented students who qualify under the Minnesota Dream Act (Minnesota high school attendance/graduation rules and related residency tests) can complete the state’s Dream Act aid application in place of the FAFSA. Minnesota Office of Higher Education materials state that Dream Act filers can be considered for state aid including the North Star Promise (free tuition at eligible public and Tribal colleges for resident students under an AGI cap) and the Minnesota State Grant, subject to each program’s rules. OHE’s eligibility chart expressly notes Dream Act applicants for those programs.

New Mexico — declined FSTC; Opportunity and Lottery do not require citizenship

• FSTC: Gov. Michelle Lujan Grisham declined (Jan. 27, 2026, per trackers).
• College aid: UNM’s financial-aid FAQ states undocumented students qualify for state and institutional aid via a state aid application, and that undocumented students can receive the Legislative Lottery Scholarship and the Opportunity Scholarship if other criteria are met. NMJC’s published Opportunity Scholarship criteria say the student must be a New Mexico resident and “does not have to be a U.S. citizen.” NMSU’s Opportunity Scholarship FAQ answers “I am not a U.S. citizen. Can I still receive this scholarship?” with: New Mexico residency is required; U.S. citizenship is not.

Oregon — declined FSTC; Oregon Opportunity Grant open via ORSAA

• FSTC: Gov. Tina Kotek declined (Aug. 14, 2025, per trackers).
• College aid: Oregon Student Aid’s Opportunity Grant page states: “Undocumented students, including DACA students, are eligible for the Oregon Opportunity Grant if they meet all eligibility requirements,” and directs non-FAFSA filers to the Oregon Student Aid Application (ORSAA). Oregon’s DACA/undocumented page lists OOG among state programs those students may reach.

The other two FSTC blockers

Keep the programs straight

1. FSTC (§25F) — federal tax credit to donors; scholarships are for K–12 expenses in participating states via approved SGOs.
2. State college grants/scholarships (Prop. 308 aid, North Star Promise, NM Opportunity/Lottery, Oregon Opportunity Grant) — postsecondary, paid with state (or institutional) money under state eligibility rules.
3. Tax-free to the student — under IRC §117, a qualified scholarship used for tuition and required fees by a degree candidate is generally not taxable income to the student. That federal rule is not unique to undocumented students; it is the ordinary scholarship rule.
4. In-state tuition ≠ a scholarship. A lower tuition rate is a price break. A grant or scholarship is money (or a waiver treated as aid) toward the bill. Prop. 308 and similar laws often do both; the irony section above focuses on state-funded aid, not tuition classification alone.

Claims check

Context / what to watch

• Illinois deadline pressure: Program scholarships begin Jan. 1, 2027. Undecided governors, including Pritzker, still have a window to elect in or decline.
• Overrides: Arizona and Wisconsin families remain shut out unless a veto is overridden or the governor reverses course.
• Map discipline: Any Kelvic Report graphic should separate vetoed, declined, and no decision — not a single gray “blocked” bucket that misstates Illinois.

Publish-ready ANALYSIS · Kelvic Report · 2026-10-23 · for /analysis/federal-scholarship-tax-credit-state-blocks