The Friedman Foundation for Educational Choice

Advancing Milton and Rose D. Friedman's Vision of School Choice for All Children

Forbes.com | Can Education Savings Accounts Level The Playing Field For All American Students?

Friday, October 12, 2012

James Marshall Crotty

Forbes.com

School choice advocates are following Apple’s lead and dramatically updating their signature product. Although not yet in demand as the iPhone, new improved education savings accounts (ESAs) could dramatically improve the price, quality, and access of K-12 schooling services, if only given a chance by state legislatures. Or so say ESA advocates.

Here’s how they work. Education savings accounts generally allow parents to deposit up to 90% of their children’s public education funds into government-approved accounts used to purchase schooling services. Like Health Savings Accounts (HSAs), ESAs rely on debit cards to make purchases. These ESA cards can be used across a wide array of education-related products and services, including academic coaching, learning camps, books, supplies, and tuition at either public or private, religious or non-religious, schools. However, whereas HSAs are financed via personal funds, ESAs are backed by public education dollars.

The ESA model rests on the bedrock belief of school choice proponents that parents should be free to choose the best learning environments for their kids. Moreover, parents should be particularly free to choose educational options outside the public school system, where, ESA advocates argue, a lack of market incentives has caused mediocrity to reign, safety to be imperiled and costs to skyrocket.

Previously only allowed to pay for college education from personal funds, the new-fangled ESA allows parents to apply public school funding earmarked for their child to the educational services of their choice. This marks a radical advancement of the original school choice idea introduced by the late economist Milton Friedman. Back in 1955,Friedman proposed a system of vouchers that would enable the government to separate its administration of schools from its financing of education. For Friedman, vouchers would break local government education monopolies and spark the creation of new, better, and more productive schools.

Sadly, that free market vision hasn’t happened, largely because current voucher programs transfer only a small pool of eligible students – namely, those considered economically “disadvantaged” — from one school system (public) to another (private). Friedman’s legacy organization, theFriedman Foundation for Educational Choice, believes ESAs for all students — rich, poor, and those in-between — can rectify the economic bias, and concomitant under-supply of students, in existing voucher programs by enabling all parents to become buyers in a genuine free market of school services.

“[Vouchers], although important, work only with schools and don’t always allow parents to choose a different approach to education,” said Arizona State Sen. Rick Murphy, who sponsored legislation to expand the nation’s only ESA program. “ESAs, on the other hand, give parents the flexibility to fill in their children’s learning gaps with specialized services, like tutoring or online courses. There’s not any other tool that allows parents to do that.”

Passed in 2011, Arizona’s one-of-a-kindEmpowerment Scholarship Accounts enable parents of children with special needs to opt out of public or charter schools and receive 90 percent of their dedicated state funds into an account accessed through a use-restricted debit card. Those funds can be used to purchase services from qualifying online education providers, private schools, tutors, textbook providers, and licensed or accredited education therapists. Critically, parents can invest unused dollars (up to $2000 per child per year) in federally approved college savings plans (which have more flexible investment options, including mutual funds). This latter reform — a first for the school choice movement, which has historically focused on K-12 schooling — motivates parents to carefuly manage each penny when picking an education provider. This, in turn, reduces cost inflation from third-party providers (another feature that vouchers lack).

Arizona’s ESA participation numbers most likely will increase, as the program expands in the 2013-14 school year to include students from failing public schools and school districts, youth adopted out of the state’s foster care system, and children of active duty military personnel. Including all those students will double the program’s eligibility pool to around 250,000 kids.

The diversity of choices offered through the Arizona law, supporters say, also strengthens the constitutionality of ESAs. Because some state constitutions’ Blaine Amendments prohibit private institutions from receiving public funds — a relic of 19th century anti-Catholic sentiment – vouchers have been legally challenged in various states. Even though voucher funds are directed to private schools by parental request — coupled with the fact that vouchers have been ruled constitutional by the U.S. Supreme Court — some states’ Blaine Amendments still prohibit the programs.

Arizona’s Blaine Amendment is one. There, the state Supreme Court ruled vouchers for special-needs children had one use — to pay for private school tuition — thus making them unconstitutional. ESAs, on the other hand, don’t face that criticism, given the bevy of options for which they can be used. Still, that hasn’t stopped school choice opponents from challenging Arizona’s program.

Will ESAs spread like wildfire across the country, as Milton Friedman predicted would happen with private school choice (currently found in 21 states and Washington, D.C.)? Well, the idea is being discussed in North Carolina and was proposed last year in Ohio and Florida.

Unfortunately, because ESAs represent a fundamental change to the way public education is delivered, they face strong institutional resistance. Florida’s ESA proposal never got out of the draft phase, and the ESA option inOhio’s bill was pulled amid criticism from school district leaders. Moreover, Arizona’s education savings accounts are available only to at-risk students, a means-testing feature that stymies ESA’s trust-busting benefits.

Nevertheless, as state governments — faced with draconian education cuts — grow desperate for low-cost solutions to the country’s pervasive academic mediocrity, ESAs might get a second look. Especially since there is far more at play here than school choice accessibility.

With ESAs, state governments are looking at a potential economic bonanza. Indeed, if ESAs statues were expanded to allow parents to invest more of their dedicated K-12 education funds into, say, mutual funds (as one can with HSAs), the potential for dramatic investment returns — and, thus, higher tax revenue — is far greater than if the funds sat parked in some low-paying savings account.

Moreover, as parents better monitor and distribute their dedicated public education funds, they will have more money to pay for their children’s secondary and college education. Such additional revenue streams could also level the playing field in secondary and college admissions, as poor and middle class parents will be able to afford the private K-12 tutoring, coaching, and test prep services currently reserved for wealthier families.

Given proper safeguards against abuse, such disaggregation of educational services from the prevailing public education monopoly can only be a good thing for education consumers. Just as importantly, it will be a welcome windfall for private providers of after-school enrichment, many of whom have heretofore relied on the the well-to-do for the bulk of their revenue. With ESAs tied to investment accounts, parents could allocate those funds as see they fit. As a result, private education services might explode in size and value.

Education startups, and their early investors, that tie their wagons to the school choice and ESA movements could be additional beneficiaries. So too will the sundry Wall Street mutual funds destined to receive the lion’s share of investible ESA money (make of that development what you will).

However, the biggest beneficiaries could be American parents, who are given a welter of choices when it comes to the purchase of a smart phone, but almost none when it comes to the education of their children.

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