Analysis: Time to Consider Education Savings Accounts

Published September 1, 2005

As vouchers and tax credits move from theory to practice in cities and states across the country, greater attention is being focused on matters of program design. One design feature that could boost the effectiveness of school choice and possibly minimize the threat of increased regulation of participating schools is Education Savings Accounts, or ESAs.

Education Savings Accounts

ESAs would be tax-sheltered savings accounts similar to Individual Retirement Accounts (IRAs) and the newer Health Savings Accounts (HSAs). In the case of IRAs and HSAs, employers and individuals make deposits into the accounts and spending is limited–until the individual reaches a certain age for IRAs, and only for health care expenses for HSAs.

An ESA would operate similarly, with spending limited to education expenses, with the important difference that governments would deposit into the ESA each year the money collected from taxes that would otherwise go to public schools. Parents could then draw on the account to pay for tuition at the public or private schools of their choice, or pay for tutoring and other educational expenses for the student. When the student reached a certain age (19, 21, or 23 are often suggested), anything left in the account would revert to taxpayers.

ESA Benefits

The ESA replaces the idea that a voucher or refundable tax credit would be a certificate or scholarship worth a specified amount when redeemed for tuition by a participating school. Instead, each student would have a savings account from which his or her parents or guardians could pay for educational services provided by a variety of service providers.

ESAs recognize trends in education leading away from the conventional school as the sole place for K-12 learning by freeing parents to choose multiple service providers in addition to, or instead of, paying tuition to a single school. The result could be an explosion of creativity as tutors, curriculum specialists, and distance learning providers compete to serve a rapidly expanding market.

If a parent chooses a school or other vendors at a cost less than the amount in the student’s ESA, the difference would remain in the student’s account and be used for non-tuition expenses or saved for tuition in later years or even for college tuition (if allowed by state law). This would encourage schools and other providers to compete on price, rather than simply set their tuition or fees equal to the value of a voucher or tax credit.

ESAs could make school choice more popular among suburban parents who think their government schools are of high quality but impose too great a tax burden. Per-student spending for suburban high schools often exceeds $12,000, more than even relatively expensive private schools typically charge for tuition. Many parents would be tempted to enroll their children in a private school charging, say, $9,000, and place the remaining $3,000 in the student’s ESA.

ESAs, finally, could protect parents and schools from increased government regulation, which is always a threat under tax credit and voucher programs. An ESA would stand between governments and schools, with tax dollars first deposited into the student’s account and then tuition or fees paid by check or debit card by the parent or guardian. Schools would not receive payment directly from government agencies.

Examination of the legislative histories of IRAs and HSAs suggests that neither has experienced increased restrictions on how money deposited into accounts can be spent or new regulation of service providers paid from the accounts. Indeed, the trend with HSAs is in the opposite direction. Legislative proposals are pending to expand participation, raise the amount that can be deposited, and lift restrictions on how the money can be spent.

Not a New Idea

ESAs are not a new idea. For example, they were the central feature of a proposal made in 1992 by The Heartland Institute to the New American Schools Development Corporation as part of a national competition for “breakthrough” ideas for school reform. The design and implementation team included John Taylor Gatto, Eric Hanushek, Myron Lieberman, Edwin West, Gary Becker, James Coleman, and other leading school choice proponents.

The plan would have created a pilot program in Pilsen, a neighborhood in Chicago. Parents would have been given “Individual Education Accounts” from which they could pay service providers and curriculum coordinators of their choice. Arthur Anderson, the worldwide consulting firm, was part of the design team and would have conducted research into the “marketing, financing, regulatory, and legal concerns and needs of potential service providers under an Educational Certificate program.”

The proposal placed in the top 4 percent of 686 competitors but did not receive funding. Had it been funded, it would have been a great demonstration of the promise (or perhaps pitfalls) of the ESA concept.

Ballot Initiatives Failed

A year later, ESAs were part of the first modern school choice initiative to appear on a ballot–the 1993 California Parental Choice in Education Initiative. Three years later, the California Educational Freedom Amendment contained similar language.

Both initiatives were defeated. In these two cases, ESAs would have allowed unspent balances to roll over and be applied to tuition in later years or college tuition.

During 1996 and 1997, George Clowes and I worked with the Illinois Legislative Reference Bureau to draft “The Heartland Plan for Illinois,” a model bill that includes ESAs. Heartland Policy Studies explaining and defending that bill were published in 1996 and 2002.

In 2003, Herbert Walberg and I expounded on ESAs in chapter 12 of a book published by the Hoover Press, Education & Capitalism. That same year, Milton Friedman endorsed the concept of “partial vouchers” in an interview published in the Winter 2003 issue of Education Next.

“Why not let [parents] spend part of a voucher for math in one place and English or science somewhere else?” asked Friedman. “Why should schooling have to be in one building? Why can’t a student take some lessons at home, especially now, with the availability of the Internet?”

In the Summer 2005 issue of Cascade Update, John Charles, president of the Cascade Policy Institute in Portland, Oregon, proposes “Individual Education Accounts,” to be created “for each Oregon child at birth.” Each year the state would deposit $2,000 into each account. When the child reaches school age, “the parents would have two choices: send the child to public school and forgo the annual $2,000 deposit into the child’s account, or begin dipping into the child’s personal account to homeschool the child or pay for private school tuition, in which case the annual deposits of $2,000 would continue for every year the family did not use public education.”

Greater Parental Control Promised

Interest in ESAs seems to be growing as more policymakers begin to take school choice legislation seriously. They are also hearing interest in the concept from the burgeoning homeschooling movement, where parents take for granted that they will be paying more than one education service provider at a time. Thousands of service providers have emerged in recent years to serve that market.

By giving parents greater control over how their education dollars are spent, ESAs allow vouchers to come closer to the model of competitive markets described by Milton Friedman and more recently by John Merrifield. By encouraging price competition and innovation and making regulation of service providers less likely, ESAs avoid the pitfall of relying too much on third parties (government in the current system and scholarship-granting entities under tax credit plans) to pay for schooling.

Joseph L. Bast ([email protected]) is president of The Heartland Institute, publisher of School Reform News, and author of several books on school reform.

For more information …

The publications mentioned above are available online: The Heartland Plan for Illinois:

The Heartland Plan for Illinois: Model School Voucher Legislation:

Education & Capitalism:

Also of interest: :

Ten Principles of School Choice

A Short History of Education Savings Accounts

Pearl Rock Kane’s interview with Milton Friedman, titled “Choice and Freedom,” in Education Next,