4 ways to pay: how Treasury's §25F rules say scholarship money has to move

Awarding a scholarship is half the job. The other half is paying for it, and Treasury's §25F rules released October 1, 2026 are specific about how. Under proposed § 1.25F-3(c)(5), an SGO must verify that scholarship money is spent only on qualified elementary or secondary education expenses, and it does that by paying through one of four allowed routes. The rule is proposed, but Treasury says SGOs may rely on it for contributions made starting January 1, 2027, so this is the payment system to build for launch.

The rules start with fraud prevention. Commenters told Treasury the biggest problems in existing state scholarship programs were duplicate awards, where two scholarships pay for the same expense and together exceed its cost, and spending on expenses that are unqualified or only loosely tied to a student's education. So every SGO must "implement reasonable procedures for the prevention and detection of fraud and abuse, including systems to prevent and detect the duplication of scholarship awards to the same student for the same qualified elementary or secondary education expense that collectively exceed the cost of the expense."

1. School charges go straight to the school. Tuition, fees, room and board, and similar expenses "charged by the school must be paid directly to the school." The school, in turn, "must return any payments from the SGO that are in excess of the student's costs or that are disbursed by the SGO in error." 2. Other vendors can be paid directly, such as a tutoring provider or an equipment seller, if the vendor has been verified as an appropriate provider, is not related, directly or indirectly, to the scholarship recipient, and is required to pay back any excess or mistaken payments.

3. Families can be reimbursed, with receipts. The rule's heading is blunt: "No funds may be paid directly to the family of the eligible student unless it is a qualified reimbursement." A qualified reimbursement needs a receipt showing both that the family paid and that the expense qualifies, and before paying, the SGO has to run its check that no other source has already covered the same expense. 4. A qualified digital wallet also satisfies the rule. Treasury defines it as "an electronic payment platform in which a third-party provider provides a streamlined interface for managing the administration of section 25F scholarships," where families submit purchase requests, approved expenses are tracked, and controls keep every payment on qualified expenses "by pre-approving vendors and paying vendors directly or requiring timely submission of receipts." Treasury asked for comments on that definition and on whether the final rules should add more safe harbors for verifying spending.

The wallet route has a second benefit. For the 90% spending test, money an SGO transfers to a third party for disbursement through a qualified digital wallet counts as spent on the date of transfer, as long as the SGO does not keep ownership of the funds. Payments by other routes count when they are paid. Our 90% rule guide covers how that timing works.

Two limits sit on top of the payment routes. First, an SGO is a 501(c)(3) public charity, so scholarships have to serve its charitable purpose, and Treasury says an SGO "must award scholarships only for those expenses that are reasonably necessary to further the organization's charitable exempt purposes." It points to Rev. Rul. 69-175, which denied exemption to a parents' group that ran school buses for its own members' children, as an example of private benefit. Second, the exact list of qualified expenses is still coming: Treasury calls separate section 530 guidance "a high priority." Its announcement names private-school tuition, academic tutoring, special-needs services, books, supplies, computers, and other equipment among the expenses scholarships can support. Until that guidance arrives, the statutory text in our section 530 archive and our qualified expenses guide are the reference.

The payment routes will also be checked every year. The proposed annual audit must cover "the method(s) the organization uses to track how scholarship money for qualified elementary and secondary education expenses is paid (whether by direct payment, through a qualified digital wallet, or by reimbursement)."

For an SGO setting up now, that means deciding the routes before the first award: a school-payment process with a written return-of-excess term, a vendor verification and relationship check, a receipt standard for reimbursements, a duplicate-award ledger, or a digital wallet provider that does this work. Our guide to disbursing funds to schools walks through the school side, the full rule text is in our proposed regulations archive, and the free SGO Builder covers formation step by step. See who is already operating in the SGO directory.