Education Savings Accounts: A Vehicle for School Choice
ESAs can give families ownership of the $800 billion currently spent on public K-12 education.
[Editor’s note: On June 24, 2022, the Arizona state legislature passed House Bill 2853, granting all 1.1 million school-age children in the state to education savings accounts, or ESAs, worth nearly $7,000 per year to use for tuition and other education expenses. This major milestone in education reform was the culmination of an idea first proposed in 2005 by FREOPP Senior Fellow Dan Lips, then at Arizona’s Goldwater Institute. Below is a web-based version of that 2005 paper.]
Executive Summary
Fifty years ago, Milton Friedman launched the modern school-choice movement with his essay “The Role of Government in Education,” in which he proposed a parent-directed system of school vouchers. Friedman’s idea is now becoming a reality with millions of Americans using charter schools, scholarship programs, and tuition tax credits.
This paper offers another vehicle to improve parents’ control over their children’s education: allowing them to open an Education Savings Account (ESA) for each of their children. ESAs begin with the idea that a successful primary education is the foundation of the American dream, and that parents are the best stewards of their children’s education. Instead of channeling children’s education funding through the public education system, the government would deposit those funds directly into each child’s ESA. Parents could then choose a private-, charter-, or public-school education for their child or pay for other qualified education expenses such as tutoring. Unspent money would accumulate and parents could eventually use those savings for college or job-training programs. Parents can also contribute to the accounts.
Arizona policymakers could create the nation’s first statewide system of ESAs by allowing parents the option to use their child’s portion of state equalized base funding — between $4,200 and $4,600 per traditional public-school student — to pay tuition at a school of their choice. Arizona’s decade-old charter-school system provides a practical model for designing ESAs. Currently, an average of $4,900 in state equalized base funding follows each of nearly 82,000 Arizona students attending more than 500 charter schools. [1] Federal policymakers could likewise use ESAs to give parents ownership of the approximately $57 billion currently spent on K-12 education programs.
Replacing the way states and the federal government allocate education resources with an ESA system of education finance is a revolutionary proposal. ESAs would provide greater opportunities for children of participating parents. And because unspent savings could be held in the accounts, parents would have an incentive to shop for the best schools, which would reduce inflationary pressure more effectively than traditional scholarship programs. ESAs would also help foster an “ownership society” by putting parents, not bureaucrats, in control of education resources.
Introduction: The need for—and challenge of—school choice
A good elementary and secondary education is the foundation of the American dream. A recent study by the U.S. Census Bureau found that the average annual earnings of a high-school dropout are $18,900; a high-school graduate, $25,900; a college graduate, $45,400; and a college graduate with a professional degree, $99,300. [2] Annual earnings are a crude measure of a person’s success, but common sense tells us that education is integral to taking advantage of opportunities in the new economy and to active participation in civil society.
Unfortunately, the public school system too often fails to provide students with a quality education. On the 2003 National Assessment of Educational Progress (NAEP), also known as the Nation’s Report Card, 32 percent of all eighth graders scored below basic in mathematics, and 37 percent scored below basic in reading. [3] In all, approximately one in three eighth graders cannot read or perform basic math skills. Failure rates are highest among low-income students and students in urban areas. [4] Often, cities’ school systems not only leave their students unprepared to enter college or much of the workforce, but also are violent, dangerous places. [5]
A good elementary and secondary education is the foundation of the American dream. Unfortunately, the public school system too often fails to provide students with a quality education.
Why is the United States — which boasts the world’s finest university system and leads the international economy — plagued with a substandard public education system? On international math and science exams, American students place in the middle of the pack, behind countries such as Canada, Slovenia, and Bulgaria. [6] According to the latest “Trends in International Mathematics and Science Study” (TIMSS), “[T]he available data suggest that the performance of U.S. fourth-graders in both mathematics and science was lower in 2003 than in 1995 relative to the 14 other countries that also participated in both [TIMSS] studies.” [7] Moreover, despite improvement from 1995 to 1999, “Eighth-graders in the five Asian countries that outperformed U.S. eighth-graders in mathematics in 2003 — Chinese Taipei, Hong Kong SAR [Special Administrative Region of the People’s Republic of China], Japan, Korea, and Singapore — also outperformed U.S. eighth-graders in science in 2003, with eighth-graders in Estonia and Hungary performing better than U.S. students in mathematics and science as well.” [8]
American student performance is not the result of inadequate spending. On the contrary, according to the Organization of Economic Co-Operation and Development (OECD), the United States spends more per pupil than 18 other member countries. [9] In total, American taxpayers spent $500 billion on public elementary and secondary education during the 2003–2004 school year, which is 4.5 percent of the Gross Domestic Product. [10] This $500 billion in total education funding includes approximately $8,500 currently spent on each of the 53 million students enrolled in public elementary and secondary schools. [11]
Despite constant calls for additional taxpayer dollars for America’s public schools, a growing body of evidence casts doubt on whether increasing spending would increase student test scores. According to the Department of Education, since 1970 real per-pupil spending has doubled, yet test scores have not improved. [12]
In addition to historical data trends, differences in spending levels across the 50 states suggest little correlation between spending and student achievement. The American Legislative Exchange Council’s (ALEC) Report Card of American Education 1976–2001 analyzed student performance in each of the 50 states. The report, which controlled for important background differences, found no evidence that spending leads to achievement. ALEC considered more than 100 measures of education resources and achievement, and concluded that the report “strengthens the growing consensus that simply increasing spending on education is not enough to improve student performance.” [13]
One likely reason for this stagnation in student performance is the dearth of competition in the U.S. public education system. The elementary or secondary school most students attend depends on where they live. Most parents exercise control over their child’s school by selecting a home. However, this form of school choice is limited to families with the means to purchase homes in more expensive neighborhoods, where better public schools are typically located. Families who cannot afford to live in those neighborhoods have fewer options and often must enroll their children in a local public school regardless of the school’s suitability for their children’s needs.
Despite constant calls for additional taxpayer dollars for America’s public schools, a growing body of evidence casts doubt on whether increasing spending would increase student test scores.
Public schools are supported by taxes paid at the local, state, and federal levels. Parents who opt out of the public school system and send their children to private school or educate them at home do so at their own expense. They forgo the resources that would have gone toward educating their child in the public school system. This is an option that many parents take. Nationwide, more than six million students are enrolled in private school, and more than one million students are educated at home. [14] Taken together, those students account for approximately 10 percent of the total K-12 student population. [15]
Increasingly, policymakers are embracing initiatives such as charter schools, voucher scholarships, and tax credits that give parents control over which schools their children attend. Today, 2,700 charter schools educate nearly 700,000 students in 40 states and the District of Columbia. [16] Six states (and most recently the District of Columbia) have publicly funded school-voucher proposals that allow parents to purchase a private education for their children. [17] Iowa, Illinois, and Minnesota offer tuition tax credits or deductions for families to purchase education services, while Arizona, Florida, and Pennsylvania provide scholarship tax credits allowing taxpayers to contribute toward scholarships for children to attend private schools. [18] Moreover, home schooling is legal in all 50 states. [19]
The case for ESAs begins with the idea that a successful primary education is the foundation of the American dream, and that parents are the best stewards of their children’s education.
Research examining the effects of these programs is encouraging. Empirical studies have found that greater competition in education is associated with better student outcomes and lower costs, and that parents with more control over where their children go to school are generally more satisfied with their children’s educational experience. [20]
These school choice programs represent progress toward increasing parents’ control over their children’s education. However, to help improve the quality of education nationwide, additional measures that expand educational options for all parents should be considered.
Education Savings Accounts
The case for ESAs begins with the idea that a successful primary education is the foundation of the American dream, and that parents are the best stewards of their children’s education. As such, they should control the educational resources spent on their children’s behalf. An average of $83,000 will be spent on a typical American public-school student between first and 12th grade. [21] For many Americans, this will be the most important investment made on their children’s behalf: whether these children obtain a quality education will dictate much of the course of their lives. The question confronting education policymakers is: who should control this investment? This paper suggests that parents should control their children’s education dollars, since they are most likely to advance the best interests of their children. It also presents recommendations for innovative ways to return power over education resources to parents for that purpose. [22]
This proposal permits parents to open an ESA in the name of each of their children. Instead of channeling children’s education funding through the public education system, the government would deposit those funds directly into each child’s ESA to be spent by parents, creating a system of universal, government-funded or voucherized ESAs.
Like traditional voucher programs, an ESA system would give parents control over the resources the government would have otherwise spent on their children in public schools. However, under a system of ESAs, instead of giving parents a voucher, the government would provide money directly to parents to purchase education services for their children.
An example of a similar program is Health Savings Accounts (HSAs), which enable individuals to own the resources otherwise spent on their behalf for health care. HSAs encourage individuals to be careful stewards of their health care resources rather than depend on their employer or the government to do so.
A provision of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 is designed to expand participation in HSAs. This provision allows individuals to obtain health-care coverage by combining a high-deductible health insurance plan with a tax-preferred HSA. [23] Since 2003, participation in HSA plans has increased dramatically. A recent survey found that eight percent of employers offered HSAs in 2004, and 18 percent plan to offer HSAs this year. In fact, the number of individuals using HSA accounts recently surpassed one million. [24] Giving individuals greater control over their health-care spending will likely lower costs and improve services, since customers would be granted greater ability to choose providers and shop wisely for quality services.
Applying this same concept to education, under a system of ESAs, parents would be able to use the money in their child’s account to purchase an elementary or secondary education at any school they wish, including traditional public, charter, or private schools, as well as other qualified education expenses such as tutoring. Any unspent money would accumulate and parents could use it to pay for college or job training.
A number of ways to provide incentives for increased savings and ownership of education resources through a system of ESAs is discussed in greater detail below.
Part I. How the states and the federal government could implement ESAs
Replacing the way that states and the federal government allocate education resources on behalf of the nation’s nearly 50 million school children with an ESA system of education finance is a revolutionary proposal. The following is a discussion of how state governments as well as the federal government can begin to implement such a system. A basic ESA proposal is also outlined for the state of Arizona.
Under a system of ESAs, parents would be able to use the money in their child’s account to purchase an elementary or secondary education at any school they wish, including traditional public, charter, or private schools, as well as other qualified education expenses such as tutoring.
How states can initiate an ESA program
In 2000, the national average per-student expenditure was $7,000. [25] That figure, however, masks the wide diversity of actual per-pupil expenditures across states and localities, and how those expenditures are divided among different levels of government.
On average, the federal government provides 7.3 percent of K-12 education resources, state governments provide 49.7 percent, and local governments fund the remaining 40.8 percent. [26] Typically, state governments fund public schools on a per-student basis according to their overall enrollment. The more students a public school enrolls, the more funding the state gives it.
One way to fund a state-level ESA is for parents of a child eligible to enroll in the local public school to inform the state government of their intent to opt out of the public-school finance system, as parents of private-school or home-schooled students currently do.
One way to fund a state-level ESA is for parents of a child eligible to enroll in the local public school to inform the state government of their intent to opt out of the public-school finance system, as parents of private-school or home-schooled students currently do. However, unlike the current system, the state government would transfer the education funding it would have spent on that child to attend public school into his or her ESA. Parents could then use that money to pay for another traditional public school, charter school, or private school of their choice, as well as other qualified education expenses.
Any money not spent by the parents on their child that year would remain in the account and could be invested. The government could set up parameters for allowable investment options. For example, parents could be restricted to investing in vehicles above a certain risk level. A potential model for these investment accounts could be the Thrift Savings Plan for federal government employees, which allows participants to choose from one of five investment vehicles ranging in risk level from stock index funds to blends of government bonds. [27] Parents could then use the investment earnings, without tax penalty, for future qualified education expenses, including additional tutoring, college tuition, and job training.
How Arizona can implement ESAs
Since, according to the National Center for Education Statistics, a state government typically funds about half of the total per-pupil expenditure, how could a state such as Arizona adequately fund ESAs? Answering this question requires understanding how education is funded in Arizona.
A recent report by the Goldwater Institute and the Milton and Rose D. Friedman Foundation found that in Arizona the “average per-student state base equalization funding to cover basic operations, transportation, and associated capital costs ranges between $4,200 and $4,600.” [28] This is the amount the state has determined is tied to students when they enter the public school system, when they leave it, or when they change districts. It is variable, or based on student enrollment. However, the per-student state base equalization (or formula) funding amounts to only half of the total funding equation. An average of $4,309 in non-equalized, non-formula funding, which is not based on student counts, remains with school districts even if students leave. Thus, based on financial data reported by the Arizona Department of Education, researchers Susan L. Aud and Vicki Murray find that “the average total spending for an Arizona public-school student is between $8,500 and $9,000.” [29]
Based on this detailed analysis of per-student funding in Arizona, Aud and Murray explain how a hypothetical school-choice program could be funded,
Elementary education grants worth $3,500 and high school education grants worth $4,500 are less than the minimum per-student state and local equalized base amount the state determined should follow students. If five percent of the K-12 student population, roughly 40,000 students, were given education grants in fiscal year 2003, the state and local school districts could have realized a net savings of $32 million. Funding for half of the school districts would have remained unchanged, and funding for the other half would have decreased by less than one percent. [30]
This analysis suggests how the Arizona state government could initiate an ESA system of school finance that could include private schools without a negative fiscal impact. Under the existing education finance system, the state has already determined how much funding should follow students to public schools of their choice. With an ESA system, the state could deposit an amount slightly less than the public-school formula funding into a child’s ESA instead. Parents could then home-school or send their child to the traditional public, charter, or private school of their choice.
Even though a child whose parents opt out of the existing finance system would receive less in state funding, the advantage of an ESA system is that parents would have an incentive to find the best school for their child at the best price since they could use any savings to pay for their child’s college education, job training, or tutoring. An ESA system would also increase their educational options by recognizing that private schools are part of Arizona’s education marketplace. Furthermore, an ESA system would intensify competition for students among traditional, charter, and private schools, which would help keep education costs down by giving all schools an incentive to use education dollars as productively as possible.
The charter school example: A competitive education marketplace works
Arizona’s successful experience with charter schools suggests how an ESA program might work. When Arizona passed what is now widely considered the nation’s strongest school choice law in 1994, few would have imagined that almost 10 percent of the state’s students would be attending charter schools just a decade later. Today, nearly 82,000 students attend more than 500 charter schools across the state. [31]
As a result of Arizona’s charter-school law, public money also follows students who attend charter schools, which are privately operated and independent of public school districts altogether. [32] Like the ESA proposal described above, charter schools demonstrate that creating a marketplace in education gives parents a powerful incentive to find the school that best meets their children’s needs. In addition, the state and localities realize a savings when parents choose to send their children to charter schools, which receive an average of $5,900 per student in total state and local revenue compared to about $7,500 per student in traditional public schools, according to the Arizona Department of Education. [33]
The growth of Arizona’s charter schools also shows the power of a competitive education marketplace. A variety of charter schools have opened in the past 10 years to satisfy increased demand from parents for education options. Likewise, traditional public schools now offer a greater array of educational programs. A number of studies also demonstrate that Arizona’s experience with charter schools has boosted student achievement, increased parental satisfaction rates, and improved traditional public-school performance. [34]
Under the current finance system, parents can choose their child’s public school, but they have no direct control over their child’s education funding. In fact, many public-school parents probably do not know how much funding their school receives for their child. [35] This means parents have no incentive to find the best education at the best price, and schools have little incentive to spend education dollars more efficiently. An ESA system of education finance would give parents direct control of resources that would otherwise be spent by the state on their child’s behalf under the current system. Such a system would also give parents more choices about where to send their children to school even if policymakers opted to reduce ESA amounts for parents enrolling their children in private school.
Would ESA accounts facilitate real private-school choice?
Would ESA stipends from the state of approximately $3,500 for elementary-school students and $4,500 for high-school students, both less than the average state public-school formula funding amounts, be enough to facilitate real private-school choice? While this amount may seem modest, the cost of tuition at the average Arizona private elementary- and middle-school is approximately $3,700. [36] The average private high-school tuition is about $5,500. [37] Moreover, 89 percent of private schools offer some form of financial aid. [38]
National estimates of private-school tuition are similar to the Arizona estimate. According to the National Center of Education Statistics, the average private-school tuition across America was approximately $4,700 in 2000. [39] As is the case in Arizona, private elementary schools typically charged less than $3,500 in annual tuition whereas the average tuition at a private secondary school was approximately $6,000. [40] This means that ESA grants worth $3,500 per elementary student would likely cover all or most of the cost of elementary education, while ESA high-school grants worth $4,500 would cover the cost of approximately 75 percent of the average private secondary-school tuition. [41]
However, it is also important to consider how students’ ESAs could be further augmented. As Aud and Murray explain, students using state grants to purchase education services outside of the public school system would also save state and local governments approximately $4,300 per student. [42] Therefore, it would be reasonable for local governments to also contribute some resources to the child’s ESA if he or she forgoes public education. Combining some of these resources with the state grants to the child’s ESA would empower parents with even more school-choice options. Parents or other family members could also be allowed to deposit money into a child’s ESA.
An ESA system of education finance would give parents direct control of resources that would otherwise be spent by the state on their child’s behalf under the current system.
The increased competition and more robust market for private schools will also be an important vehicle for ensuring that families have private school choices that they can afford. Right now, private schools have to attract families willing to pay out-of-pocket tuition and forgo the “free” public-school alternative. The creation of widespread school choice would reduce the bias in favor of public schools, making private school a more attractive option for many families. The explosion in the number of charter schools in Arizona suggests that new schools can and will be created when more parents have the ability to choose alternative schools. For example, the number of charter schools has increased from 70 schools during the 1995–96 school year to 516 as of December 2004, enrolling nearly 82,000 children in the 2003–2004 school year. [43]
There are numerous other factors that state legislatures will need to take into account, including what should constitute allowable uses of ESA funds to how accountability and progressivity could be built into the system. A discussion of how policymakers could approach those issues follows later in this paper.
Part II. How the federal government could initiate an ESA program
The majority of education reform occurs appropriately at the state and local level, but over the past three decades the federal government’s involvement in local education has increased. The U.S. Constitution does not expressly grant such federal involvement, and evidence suggests that federal intervention in education has not been effective in improving student achievement thus far. This section examines how the federal government could begin to devolve its role in local education by redirecting the resources it currently spends into a system of ESAs.
The expanding federal role in education
In 2005, the federal government is scheduled to spend approximately $57 billion in discretionary appropriations for the Department of Education for all levels of education, in addition to $9 billion in mandatory appropriations. [44] There is little evidence to suggest that federal education spending improves student achievement. Federal spending on education has increased from $3.7 billion in 1971 to $57 billion in 2005 in real dollars. [45] Over that time period, there has been no evidence of significant improvement in student outcomes on national exams. [46] As noted author and education researcher Andrew Coulson reports, “Student achievement has stagnated or fallen in most subjects since 1970…That is the verdict of the five most reliable sources of evidence: the National Assessment of Educational Progress (NAEP), the International Evaluation of Education Achievement (IEA), the Young Adult Literacy Survey (YALS), the National Adult Literacy Survey (NALS), and the International Adult Literacy Survey (IALS).” [47]
The word “education” is not mentioned in the U.S. Constitution. Conservatives have long sought to end the federal government’s involvement in local education. In 1980, Ronald Reagan campaigned to abolish the U.S. Department of Education, which he dubbed at the time “President Carter’s new bureaucratic boondoggle.” [48] As late as 1996, the Republican Party platform continued to call for the abolition of the Department of Education. [49]
Yet over the past four years, a Republican president and Republican Congress have increased Department of Education outlays by 50 percent. [50] The No Child Left Behind Act — introducing a new federal accountability regime — was President Bush’s number-one priority upon entering office in 2001. [51] It seems that few voices in the education policy debate continue to call for an end to the federal government’s intervention in local education.
Devolving federal power through ESAs
Implementing ESAs would devolve the federal government’s role in education by redirecting the resources it currently spends on numerous K-12 education programs directly to parents. Below are three basic proposals for how federal ESAs could be expanded. Importantly, these proposals are strategies for untangling current federal education initiatives and should be funded by the elimination of existing programs, not by additional taxpayer resources.
Understanding how the federal government could implement a system of widespread ESAs must begin by understanding how much federal funding is currently directed to K-12 education. Unfortunately, it is difficult to disaggregate federal expenditures into a per-pupil allotment, since most federal expenditures are aimed at specific programs, not individual children.
Table 1 provides an overview of federal education spending programs. The U.S. Department of Education spends a total of approximately $39 billion on elementary and secondary education programs. These funding resources are filtered to numerous K-12 education programs through a total of twenty program categories.
Proposal 1: Create federal ESA scholarships for low-income students
The mission of many federal education programs is to help low-income children. For example, the largest single expenditure of the elementary and secondary education budget is the $13.3 billion spent on Elementary and Secondary Education Act (ESEA) Title I grants, which are distributed to local education agencies and spent on programs that support schools with a high percentage of low-income children. The remaining $25.4 billion of K-12 education spending is filtered through 19 other federal programs, the largest of which are grants for special education, totaling $12.2 billion.
ESAs would devolve the federal government’s role in education by redirecting the resources it currently spends on numerous K-12 education programs directly to parents.
Therefore, the basic concept of the education savings account funding model described for state governments-converting basic state aid payments into ESA funding grants-is less applicable to the federal government. If the federal government disaggregated its per-student spending, the amount would likely be relatively low. For example, if the $13.3 billion in Title I spending on low-income children were distributed equally among the approximately 28 million children participating in the federal free-and reduced-school lunch program, each child would receive an ESA deposit of approximately $475 in funds. [52] If all ESEA funding, excluding the $12 billion spent on special education, were deposited into the ESAs of these 28 million low-income students, each child would receive approximately $950. [53]
Understanding how the federal government could implement a system of widespread ESAs must begin by understanding how much federal funding is currently directed to K-12 education.
It may seem unlikely that such a small amount would encourage many families to opt out of the current public-school finance system to purchase private education. However, a federal ESA program could also be coupled with state ESA programs or with additional incentives for savings to give parents greater resources for school choice. Moreover, there is reason to believe that many parents — even low-income parents with limited resources — would make additional contributions to pay for their child’s education if given even a modest scholarship grant.
For example, several existing nonprofit organizations focus on providing low-income families with scholarships so that they can afford private school, but they still require participating families to contribute their own funds to their children’s education. In 1998, Children’s Scholarship Fund (CSF) announced the availability of 35,000 scholarships for low-income students across the country to attend private K-8 schools. Eligibility was determined by guidelines similar to those of the free-and reduced-school lunch program. Families were required to commit to an average out-of-pocket co-payment of approximately $1,100 to receive an average scholarship worth $1,200. More than 1.25 million families applied. [54]
The overwhelming response to the CSF scholarship program for private-school scholarships suggests low-income families, like middle- and upper-income families, want the best education for their children and are willing to pay for it given the chance.
Federal ESAs would put the parents of roughly 28 million children in charge of the federal resources that federal program administrators currently control on their children’s behalf. A federal ESA finance system is more equitable than the existing system since it enables all parents to take ownership of their children’s education, regardless of income level. And, because the lion’s share of federal education programs serves low-income children, putting their parents in charge instead of federal administrators would be a significant stride toward devolving the federal government’s role in education.
Proposal 2: Expand existing ESAs
Alternatively — or in addition to the program described above — the federal government could use the principles of existing grant-funded ESA reforms to help families save money for educational expenses themselves. Already, the federal government allows individuals to contribute up to $2,000 annually to a child’s Coverdell ESA, which is allowed to grow tax-free and can be used to pay for education expenses such as private elementary, secondary, or college tuition. [55] Any individual can make a contribution to a child’s Coverdell ESA, so long as he or she earns less than $110,000 annually or $220,000 for a joint filer. [56] However, since the tax benefits of this program are deferred, it is unlikely that it encourages many new families to save for and enroll their child in private elementary and secondary schools.
Already, the federal government allows individuals to contribute up to $2,000 annually to a child’s Coverdell ESA, which is allowed to grow tax-free and can be used to pay for education expenses such as private elementary, secondary, or college tuition.
A federal ESA program could expand on the existing ESA framework to help more families. For example, the federal government could make contributions to their ESA tax-deductible. The amount of revenue the federal government would forgo by making such donations tax-deductible could be offset by the reduction in funds currently used for administering federal education programs. Similarly, the contribution cap — currently $2,000 per beneficiary per year — could also be increased to encourage more resources to be invested in a child’s ESA.
However, these initiatives would not affect families who do not pay federal income tax or whose liability is too low to qualify for a federal tax deduction. To reach those families, the government could provide a cash incentive for savings, including a dollar-for-dollar match for the first $1,000 low-income families deposit into their children’s ESAs. The federal government could also limit this provision to families below an income threshold and phase out the match provision. For example, after the initial $1,000 federal dollar-for-dollar match, for each additional $100 the family deposits, the federal government could contribute a $50 match, capping total federal matching contributions at $2,000. Thus, a low-income family saving $3,000 for their child would have a total of $5,000 including the federal matching grant.
A federal ESA program could expand on the existing ESA framework to help more families. For example, the federal government could make contributions to their ESA tax-deductible.
As described above, there is evidence that a significant number of low-income families would take advantage of this opportunity to save for their children’s education.
Proposal 3: The Pell Grants for Kids model
Senator Lamar Alexander of Tennessee, the former U.S. secretary of education, has proposed a new federal-school voucher proposal, Pell Grants for Kids, designed to foster an education marketplace. [57] The proposal would provide a $500 scholarship to each low- and middle-income child in America, approximately 60 percent of all students. The $500 scholarship could be used for: 1) programs at public school; 2) private school tuition or any educational program such as tutoring; or 3) home-schooled children enrolled in an accredited educational program. Senator Alexander estimates that the proposal could be available to 60 percent of America’s 50 million school-age children, which, according to Senator Alexander, “would put the parents of approximately 30 million children directly into the education marketplace, each of them armed with a $500 grant, thereby encouraging choice and competition.” [58]
If enacted today, Senator Alexander’s proposal would cost approximately $15 billion. However, Senator Alexander has suggested phasing in the Pell Grants for Kids program by offering the scholarships only to qualifying kindergarteners and first-graders during the first year, adding a new class of students each year thereafter. This proposal would cost $2 billion in year one. [59] To put this amount in perspective, $2 billion is five percent of the Department of Education’s projected budget on elementary and secondary education, about the same amount currently budgeted under the “Other” category in Table 1.
The Pell Grants for Kids proposal provides a model for designing a federal ESA program. However, instead of giving funds to schools in the form of $500 scholarships, those funds could instead be deposited directly into children’s ESAs, giving their families true financial ownership over education resources. Even though the $500 contribution is modest, past experience with non-profit scholarship organizations, as described, suggests that many families are willing to make great sacrifices to provide better opportunities for their children — and giving those families relief is a fair and reasonable policy goal.
No net increase in the federal role in education
A cornerstone of student-centered education reforms is transferring control over education spending from government officials to parents on behalf of their own children. Proposals for federal ESAs should be used to devolve federal control over education resources to parents, not expand the federal government’s role in education. Education resources currently dispersed by the federal government for predetermined programs should instead be dispersed into ESAs for parents to spend on the educational services they want for their children.
Part III. Designing an ESA program at the state or federal level: Additional considerations
There are other considerations policymakers should address when designing an ESA program that take into account the policy preferences of each state’s population as well as the funding system used by their states and localities.
Accountability
Empowering families to control the education funding that states and the federal government already spend on their children’s behalf requires that families be good stewards of those resources. Policymakers should therefore implement accountability measures to help ensure that families put ESA funds to good use.
To put this amount in perspective, $2 billion is five percent of the Department of Education’s projected budget on elementary and secondary education, about the same amount currently budgeted under the “Other” category in Table 1.
Policymakers could restrict ESA funds to qualified educational expenses in the same way that health savings accounts must be spent on health expenses. Policymakers could also limit what families do with unused funds after the completion of their children’s education. For example, any unused money after completion of a child’s education could roll into his or her 401k or other retirement vehicle. Such restrictions would minimize any incentive a parent may have to sacrifice their child’s educational interests to accrue a large account for personal gain.
Some policymakers may want to implement further measures, such as requiring parents to use ESA funds at educational facilities that are accredited or conduct regular testing. Existing state and federal regulations may help guide policymakers as they try to balance the demands of accountability on the one hand and the freedom of parents to direct their children’s education on the other.
One concern might be the use of ESA funds for home or private schooling. There are more than one million families currently home-schooling their children. [60] Every state allows home schooling, but the level of regulation varies. [61] With regard to private schools, the U.S. Department of Education reports, “No state in the union mandates the accreditation of all private elementary and secondary schools,” but most states do have a private school approval process. [62] Currently, absent additional regulations, the average standardized test scores of private and home-school students exceed national averages. [63] Moreover, states participating in the federal No Child Left Behind Act are prohibited under that law from requiring home-schooled students to participate in mandatory testing, “whether or not a home school is treated as a home school or a private school under State law.” [64]
Policymakers should implement accountability measures to help ensure that families put ESA funds to good use.
Policymakers should also keep in mind that many existing private schools are already accredited, either through the states or private accrediting agencies, and they administer annual standardized tests. [65] Nevertheless, because ESAs use public funds, private schools opting to participate in such a program could be required to report nationally norm-referenced test scores of individual children using ESA funds available to their parents and aggregate scores available to the public. Working with home-school associations, home-schooling parents using ESAs could be required to make aggregate test scores publicly available as well.
Yet, a growing number of children have special educational needs, and annual snapshot assessments would likely give an inaccurate picture of their academic achievement. Value-added analysis, a method that measures achievement growth over time, should be applied to those students’ individual and aggregate test scores so their schools, public, private, or home, are not unfairly scrutinized.
However, mandating accreditation and testing could be costly for low-tuition private schools, forcing them to raise tuition prices. Such mandates could also prevent new private schools from opening. Typically, accrediting agencies require a school be open for a number of years before they will even conduct initial site visits, and afterward, the process can take more than a year to complete. [66]
Thus, additional regulations could limit schooling options for parents. Yet giving them greater purchasing power in education would likely result in a flourishing marketplace for education services such as those used by home-schoolers as well as parents who supplement their child’s formal education. ESAs would also strengthen the most important accountability mechanism: parents. All parents would be empowered to choose alternative schools if they believe their children’s current schools do not meet their needs.
Effects of ESAs on governments’ budgets
Because ESAs use resources that governments already spend on behalf of students and put those resources in the hands of parents, ESAs should not increase the size of government. On the contrary, under an ESA finance system, government administration should shrink.
ESAs could also save the government money because parents using them have an incentive to find the best education at the best price. This saves government resources in the short-term since parents can pay for educational services such as tutoring or remediation with their existing ESA funds rather than rely on the government to provide those services at additional cost. Over the long-term, the competition schools must face to attract and keep students makes them more efficient.
ESAs intensify the competition that traditional public schools in many states already face from charter schools by including private schools, and they are more equitable than the current education finance system. More than six million students nationwide already attend private schools. [67] In most cases, their parents make significant sacrifices since they are, in effect, paying twice: first, they pay taxes to support public schools their children do not attend; and they pay again for private school tuition. By allowing those parents to access some of the money that would have been spent on their children in public schools anyway, the state may initially experience additional costs. However, policymakers concerned about the potential impact on state budgets could consider means-testing ESAs or phasing out the government contribution based on income.
Effects of ESAs on public schools
There are some concerns that parental control over their children’s education dollars would harm public-school districts financially. This fear is unwarranted. Parents who use their children’s ESAs to switch them from public to private schools reduce the public schools’ cost of educating them, lowering the overall cost of public education. Public schools could then dedicate their resources to providing a better education for a smaller universe of students.
ESAs would create an important dynamic that will have a positive impact on the public school system.
Most important, ESAs would create an important dynamic that will have a positive impact on the public school system: competition. Empirical evidence of existing public and private-school choice programs show that competition improves the entire public school system, helping both the students who switch to charter or private schools as well as the students who remain in traditional public schools.
Harvard University economist Caroline M. Hoxby compared areas with varying levels of school choice and found that it lowers costs and improves student achievement. Hoxby found that by fully exercising open-enrollment laws, which allow parents to send their children to any public school they wish even if it is outside the public school district where they live, school efficiency could rise by 10 percent, achievement could be roughly three to six percentile points higher, and spending could be almost eight percent lower. [68]
Focusing on Arizona’s charter schools and their effect on surrounding traditional public schools, Hoxby found that “charter competition made Arizona public schools improve their productivity relative to their own initial trends.” [69] That is, traditional public-school student achievement improved without spending more money. Even students in public schools who lagged behind their peers in other public schools raised their scores on National Assessment of Educational Progress (NAEP) scores by 1.4 percentile points in fourth-grade reading and math each year after charter-school competition was introduced. [70] According to Hoxby, “If Phoenix were to maintain its faster rate of improvement, it would close the achievement gap between its students and those in its affluent suburbs in less than ten years.” [71]
Parents who use their children’s ESAs to switch them from public to private schools reduce the public schools’ cost of educating them, lowering the overall cost of public education.
Low-income students in Milwaukee, Wisconsin, are eligible to receive vouchers to attend private schools. Hoxby found that student scores on statewide exams in public schools that faced the most competition from private schools “improved by more in every subject area tested than did the scores of the students facing less or no competition from vouchers.” In fact, Milwaukee public schools’ “mostly poor and minority students experienced an upward spiral in achievement as a result of competition.” For example, math scores increased by about seven percentile points per year, and social studies scores increased by more than four percentile points per year. [72]
Progressivity
State and federal policymakers may wish to focus their resources on the low-income families whose children are disproportionately enrolled in substandard public schools and whose ability to pay for an alternative school is limited.
ESAs can easily be structured progressively so that lower-income families receive greater assistance. State governments may even phase out government deposits into ESAs based on income. For example, families with annual incomes of less than $20,000 could receive the maximum deposit from the government. Government subsidies could phase out gradually so that families with annual incomes greater than $100,000 would not receive additional deposits. However, maximum annual income levels for participating families ought to be adjusted to take into account the number of children so that larger families are not penalized.
Such adjustments are important since other incentives, such as making personal contributions to an ESA tax-deductible, would only benefit families with annual incomes high enough to have a tax liability. Of course, all taxpayers pay for the public school system, and those families who have opted out of the public school system reduce the burden on taxpayers. Therefore, it is equitable for all families who forgo public education to receive relief from the government. However, policymakers who consider reaching lower-income students their first priority can easily structure ESAs to make them primary beneficiaries.
Part IV. The benefits of a competitive education system delivered through ESAs
ESAs offer several benefits. Like other school-choice programs, they would increase competition, encourage education entrepreneurs to enter the marketplace and offer unique services, and, through the economic force commonly referred to as creative destruction, weed out underperforming education providers. In addition, ESAs would encourage savings and help control education costs since parents would have an incentive to use their education dollars wisely. ESAs would also be an important step toward returning control of education to parents.
Incentive for savings and an innovative education marketplace
Parents would have an incentive to shop carefully for their child’s education since any money not spent in a given year would be saved for future use and would accumulate interest for the child. Parents would become adept education consumers, which would stimulate the development of a marketplace offering a wide range of educational options. Importantly, ESAs would create an even stronger incentive to save than school vouchers or education grants, which are typically awarded in a lump sum, leaving private schools no incentive to offer tuition lower than the predetermined amount. By providing parents with an incentive to shop carefully for their child’s education, and thereby creating a marketplace in education, ESAs would encourage education providers to compete to offer the best education possible for the lowest price.
Fostering an ownership society: replacing dependency with independence
ESAs would transfer control from the hands of government to the hands of parents, creating a greater sense of participation in our education system. ESAs fulfill the requirement contained in every state constitution that all children have access to elementary and secondary education, but rejects the idea that state bureaucrats are better positioned than parents to control exactly how that education is provided. [73]
ESAs would encourage savings and help control education costs since parents would have an incentive to use their education dollars wisely.
ESAs would also be an important step in transforming America into an ownership society. One of the great divides in America, often lamented by politicians and sociologists, is between those who have savings and those who do not. [74] By having a savings account, even if at times the amount of resources in the account is modest, low-income parents would be encouraged to save more and would have a vested interest not only in the stewardship of that money, but also in the economy that determines the rate at which this money grows.
Voluntary participation
Many parents are happy with the education their child receives under the current public-school finance system. They would be unaffected by this voluntary program. In fact, in light of the empirical evidence showing competition in education acts as a tide that lifts all boats, even children of parents opting not to use ESAs would likely benefit from this program. ESAs therefore provide parents with new options, without taking away the old options.
Many parents are happy with the education under the current public-school finance system. They would be unaffected by this voluntary program.
Conclusion
For 50 years, education reform advocates have been searching for ways to give parents greater control over their children’s educations. This paper explores how policymakers could deliver school choice through a system of education savings accounts (ESAs). Instead of directing education dollars to school districts, the state or federal government would deposit that money into an ESA for parents to use to purchase an education at a private, charter, or public school or for other qualified education expenses such as tutoring. Unspent money would accumulate and could eventually be used for college or job-training programs.
ESAs would give families ownership of the $500 billion currently spent on public K-12 education. In Arizona, a system of ESAs could be created by giving parents control over their children’s $4,200 to $4,600 in per-pupil base state funding that follows them into the public-school classroom. At the federal level, Congress could design a system of ESAs that returns control of billions of dollars currently controlled by federal bureaucrats to parents to spend directly on behalf of their children.
Transitioning to a system of ESAs would certainly require careful attention by policymakers. For example, policymakers would need to build accountability measures into the system of ESAs to ensure that taxpayer dollars invested in ESAs would be put to the appropriate use. Nevertheless, ESAs could be an important step toward helping parents afford school choice. Like other school-choice programs, ESAs would create a more dynamic, efficient education marketplace with greater opportunities for our nation’s children. Moreover, ESAs would offer additional unique benefits. First, because unspent savings could be held in the accounts, parents would have an incentive to shop for the best schools, which would have the important effect of reducing inflationary pressure better than traditional scholarship programs. Second, ESAs would foster independence and autonomy by giving parents rather than bureaucrats control of education resources. Policymakers should explore this concept further to identify how it can be best implemented.
