Education Savings Accounts Could Expand School Choice

Published June 1, 2005

For many Americans, the most important investment the government can make on their behalf–one that dictates much of the course of their lives–is the money spent to give them a quality education. But maximizing that investment can be a problem. A Goldwater Institute study to be released this summer, written by Senior Fellow Dan Lips–“Education Savings Accounts: A New Vehicle to School Choice”–suggests a solution.

Instead of directing education dollars to school districts, Lips suggests the state or federal government could deposit that money into education savings accounts (ESAs), so parents could purchase an education for their children at the school of their choice and take control of the $500 billion currently being spent on public K-12 education.

Using Arizona as his model, Lips explains how a state-level ESA could be implemented given the existing public school finance structure.

Like many states, Arizona has an equalized system, meaning all students are entitled to receive the same amount of base formula funding, averaging about $4,400 per student.

Parents of a child eligible to enroll in a local public school could inform the state of their intent to opt out of the public school system. The state would then transfer the money that would have been spent on that student into an ESA so the parents could send their child to a private school.

Allowing Choices

Fifty years ago, Milton Friedman launched the modern school choice movement with his essay, “The Role of Government in Education,” proposing 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,” Lips explained, but he noted “many parents still do not have the power to choose their children’s schools.”

U.S. Department of Education
Department Budget by Major Program
President’s 2005 Budget Request
Elementary and Secondary Education
Program Amount (1)
ESEA Title I Grants (2) $13,342,309,000
Reading First 1,257,000,000
Striving Readers 100,000,000
Impact Aid 1,229,527,000
Improving Teacher Quality State Grants 2,930,126,000
Mathematics and Science Partnership 269,115,000
Educational Technology State Grants 691,841,000
21st Century Community Learning Centers 999,070,000
State Assessments 410,000,000
Indian Education 120,856,000
Credit Enhancement for Charter School Facilities 100,000,000
Choice Incentive Fund 50,000,000
Adjunct Teacher Corps Initiative 40,000,000
Military Families Initiative 10,000,000
Safe and Drug Free Schools Initiative 440,000,000
English Language Acquisition 681,215,000
Special Education 12,176,101,000
Vocational and Technical Education 1,012,000,000
Adult Education 590,233,000
Other 2,229,370,000
Total Elementary and Secondary Education Spending 38,679,671,000
(1) All dollar amounts in fiscal year 2005 dollars.
(2) ESEA = Elementary and Secondary Education Act.
Source: President’s 2005 Budget Request, Historical U.S. Department of Education Budget Tables, available online at:

Because private school tuition is about half the usual public school expenditure, ESAs would give parents more choices about where to send their children to school. Public school districts would continue to receive the same amount of non-formula funding, spread over fewer students, meaning the state and local districts could realize savings of about $4,300 for every student who opts out of the public school system.

Converting Federal Programs

The basic concept of ESAs for state governments–converting basic state aid payments into ESA funding grants–is less applicable to the federal government because the disaggregated amounts would likely be small.

According to President George W. Bush’s 2005 budget request, submitted to Congress last year, the U.S. Department of Education spends approximately $39 billion on K-12 education programs each year, filtered through 20 program categories. (See table.)

If all federal spending on elementary and secondary education were distributed equally to the approximately 28 million children participating in the free- and reduced-price school lunch program, each child would receive an ESA grant of approximately $475 per year. If all Elementary and Secondary Education Act (ESEA) funding, excluding the $12 billion spent on special education, were distributed to those 28 million low-income students, each child would receive approximately $950 in his or her ESA account.

The federal government could use ESAs to encourage families to save for their children’s education. Currently, individuals may open special accounts, called Coverdell Education Savings Accounts (Coverdell ESAs), on behalf of anyone under the age of 18 to help pay for education expenses such as private elementary, secondary, or college tuition. To be eligible to open ESAs, individuals must earn less than $110,000 annually ($220,000 for joint filers); they can contribute up to $2,000 annually per child. Coverdell ESAs grow tax-free and, if used for qualified education expenses, withdrawn funds are also tax-free.

A federal ESA program could build on this framework by making contributions tax-deductible. The amount of revenue foregone could be offset by funds currently used for federal education programs. Increasing the annual $2,000-per-student cap could encourage more contributions.

To help low-income families, the federal government could match the first $1,000 a low-income family deposits into a child’s ESA. The match provision could be phased out based on family size and income level to target assistance to those with the greatest need

Expanding Ownership

Like other school choice programs, ESAs would increase competition, encourage education entrepreneurs to enter the marketplace, promote personal saving, and help control education costs by giving parents a direct incentive to use their education dollars wisely.

ESAs could be an important step in transforming America into a true ownership society and closing one of the great national divides between those who have savings and those who do not. By having a savings account, however modest, low-income parents would have a vested interest in the stewardship of their children’s education resources … and in the economy that determines the rate at which those resources grow.

Vicki Murray, Ph.D. ([email protected]) is director of the Goldwater Institute Center for Educational Opportunity in Phoenix.

For more information …

Upon its release, Dan Lips’ report, “Education Savings Accounts: A New Vehicle to School Choice,” will be available on the Web site of the Goldwater Institute,