Education Provisions of OBBB

Two major education provisions of the One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, garnered a lot of ink and debate—a federal School Choice Tax Credit and an excise tax on the investment income of private universities with large endowments.

So where did they come out?

The School Choice Tax Credit

The OBBB creates a new federal School Choice Tax Credit (IRC §25F) that allows individuals and corporations to receive a nonrefundable credit of up to $1,700 per student for donations to eligible scholarship-granting organizations (SGOs). Key features include:

• SGOs must be 501(c)(3) nonprofits, serve at least 10 students across multiple schools, spend at least 90% of income on scholarships, and operate within a single state.
• Donations cannot be earmarked for a particular student.
• Scholarships can only support K–12 education expenses such as tuition, books, room and board, uniforms, and educational technology.
• Eligible students must be enrolled or eligible to enroll in public K–12 schools and come from households earning no more than 300% of area median income.
• The credit replaces the charitable deduction for the same donation and is reduced by any equivalent state tax credit.
• The program is not a direct federal expenditure but rather foregone federal tax revenue, which is capped at $5 billion annually for tax years 2026 through 2029.
• States must opt in for SGOs to operate; no state is required to participate.
• Finally, the measure does not include religious liberty protections for participating schools, raising concerns among the U.S. Conference of Catholic Bishops.

Critics argue the program may disproportionately benefit higher-income families and donors, while drawing resources away from rural public schools, which rely heavily on state and federal funding and often lack accessible private alternatives (New America critique). Broader conservative support for the provision—rooted in the earlier Educational Choice for Children Act (H.R. 833)—is reflected in commentary from groups like the Commonwealth Foundation.

A tiered excise tax on private university endowments

The OBBB also replaces the existing flat 1.4% excise tax on private university endowments with a tiered rate structure based on a school’s student-adjusted endowment (SAE), defined as the fair market value of non-educational assets divided by student enrollment. The new rates are 4% for schools with SAE between $500,000 and $750,000; 6% for SAE between $750,000 and $2 million; and 8% for SAE exceeding $2 million. The tax continues to apply only to private universities, and assets held by related entities are counted toward the total.

The measure has raised concerns about its impact on private universities’ investment strategies and its potential to disincentivize long-term endowment growth.  Two hotly debated provisions were dropped:

• One would have excluded non-citizen students from the SAE denominator, because Congress did not want to artificially inflate the per-student endowment to trigger tax liability.
• The other was a proposed exemption for religious institutions.