Vouchers, STCs, and ESAs?

What is are vouchers, scholarship tax credits, and educational savings accounts, and how do they work?

Vouchers, scholarship tax credits, and educational savings accounts are the ultimate demonstration of state-sponsored choice. They come in various forms, and are subject to a lot of debate. These programs allow parents the discretionary usage of all or some of the per-pupil FTE payment that would normally have been allocated on their child’s behalf. These programs are also distinct from charter schools in that they focus on sending kids to non-public schools, and charter schools are public schools.

The most popular types of these programs are as follows:

• Standard Voucher – This program is the simplest form of publicly funded private education. Funding goes directly from the state or district to the parent as an educational voucher that can be used to send the child to a non-public school (meaning parents are not obliged to utilize local charter schools if this program exists). Standard vouchers are typically handed out before the school season so the parents do not have to dip into savings in order to come up with private tuition. Standard vouchers are usually for tuition expenses only, so their abuse is largely checked by their limited applicability. Also, some states allow parents to send their child to a district public school outside their home zone. A voucher would allow them to simply pay whatever difference in per-pupil FTE funding may exist, which is normally the requirement in those scenarios.

• Scholarship Tax Credit (STC) (aka, Tax Credit Scholarship) – Under this program, taxpayers can actually receive a tax credit for donations made to non-profit organizations that sponsor scholarship programs. In other words, the child’s tuition might be paid for by a non-profit organization, which is funded through donations made by private individuals. The government then reimburses the donors in the next tax season with a credit for all or part of the amount donated. The important thing to remember here is that a tax credit is much more valuable than a tax deduction, which simply lowers your taxable income amount. The credit is a dollar-for-dollar reimbursement, which encourages donors to give even more.

• Individual Tax Credit and Individual Tax Deduction (ITC or ITD) – This program is a mixture of the previous two. It is similar to the Standard Voucher in that these monies are paid directly to the sending parent, but the parent is not reimbursed until tax season of the following year. In this sense, it is similar to the Scholarship Tax Credit, which can negatively influence the sending behavior of underprivelaged families. The ITC or ITD is paid directly to the parents for approved educational expenses such as private school tuition, books, supplies, computers, tutors, and transportation. Since there is no organization to play middle-man in this scenario, the parents have more freedom of choice than if a non-profit was setting certain guidelines or conditions on their STC program.

• Education Savings Account (ESA) – This method is basically a more liberal type of voucher, which utilizes a government-authorized savings account that parents pull from for more than just private school tuition and relevant fees. Parents could get extra financial assistance for things like virtual programs, remedial math workshops, private tutoring, and even higher education expenses if the law is written that way. The law can also be written to resemble a health savings account (HSA), which can accrue interest at an annualized rate.

For example, let’s say a student is zoned for a persistently failing school. Under a scholarship tax credit (STC) system, the student zoned for this school could shop around for the best education (under the guidance of the sponsoring non-profit) without the barriers of tuition or zoning. Let us further hypothesize that the total per-pupil funding rate for this state is $8,000, and the choice law is written such that the parents can claim a tax credit of up to 70% of the state’s funding rate (we’ll say the state contributes 60% of the total: $4,800) . This means the student has a $3,360 credit to use toward either a private tuition or out-of-district fees for a neighboring public school that is not failing. This type of system not only allows the student access to a better education, but the student can access it for 30% less than the student would cost the state if he/she stayed in the home district. In essence, the state is now saving $1,440 per student that leaves a failing school, money that can be reinvested in struggling schools that do not persistently fail.

Of course, this system has its limits. For instance, the STC isn’t paid immediately. Parents have to pay the initial costs of private school tuition out-of-pocket during the school year until they file taxes and get their return in the spring, so even if the $5,600 used in the previous example covers the full cost of tuition (which it likely does not), the parents would not get that amount until almost the end of the second semester. Another disadvantage to this system is the public relations nightmare of “public money going to private schools.” Public money goes to private colleges all the time (i.e. Pell Grants used at a historically religious college like Notre Dame or Texas Christian University), but when people hear about it in the K-12 system they get edgy and confrontational. In some cases, this edginess is justifiable – many private schools are not held to the same standards as public schools in relation to testing, student acceptance, special ed programs, etc. and it is crucial to make sure that only accredited institutions receive voucher money. Even so, it remains the parents’ right to choose, and many private schools excel in ways that public schools cannot.

The criteria for the payment is also important to understand. Most American non-public school choice systems are valued off the cost to the school for each student. Like the example above, the STCs are worth a certain percentage of a Per Pupil funding formula. As long as that STC percentage is set below the Per Pupil funding rate, the STC will always save the funding entity (usually the state) money. However, sometimes the STC is paid based off family income, which can be higher than a Per Pupil formula, especially if valued inversely. This is how some scholars think Chile should run their system, which is currently a flat voucher that values itself off a set amount regardless of socioeconomic status (very close to the American style tax credit based off Per Pupil funding). A flat STC model can experience inequality because if the schools are allowed to choose the students they accept (as in Chile), the schools will choose more affluent students in order to boost performance numbers and avoid any problems they consider to be associated with impoverished students. This goes completely against school choice principles, so a truly ethical flat voucher system must force the absorbing schools (public or private) to be first-come-first-serve, with a lottery in place to determine placement in the event of over-application.