ESAs and transactional friction in public education’s third era

In its third era, public education aspires to expand equal opportunity by helping families and educators provide every student with an effective and efficient customized education through an effective and efficient public education market. We cannot achieve this aspiration without successfully implementing education savings accounts (ESAs).  

ESAs are publicly funded flexible spending accounts that enable families to purchase the educational products and services they need to provide their child with a customized education. While ESAs are necessary to meet the unique educational needs of each student, we are still in the early stages of understanding how to best regulate and implement them.  

Successful ESA implementations enable families to make purchases without unnecessary transactional friction. In this context, transactional friction refers to obstacles, complexities, conflicts, and inefficiencies that frustrate families and educational providers when they try to execute simple business transactions. These tensions come, in part, from needing to assure the public that every purchase is appropriate while not undermining customization by unduly limiting what families can purchase and/or overwhelming them with excessive bureaucracy. 

Determining eligible ESA purchases 

Determining the eligibility of families’ ESA purchases is a primary source of friction between families, providers, and ESA administrators. This school year in Florida over 500,000 families will spend about $3 billion making up to 2 million educational purchases for their students. Florida’s ESA administrators are responsible for ensuring each purchase is appropriate. Appropriate meaning consistent with state law and the unique needs of the student for whom a purchase is intended.  

Determining if a purchase is appropriate for a specific student can be time consuming, which is problematic when an ESA administrator is reviewing millions of purchases annually. Families usually disagree when a purchase is denied and often initiate appeals through administrative, political, and media channels that can be time consuming and expensive to resolve. In Arizona, families are entitled to a formal administrative hearing when appealing a denied purchase. Often these hearings cost taxpayers more than the denied purchase. 

 When President Gerald Ford signed the Education for All Handicapped Children Act in 1975, school districts, schools, and classroom teachers were required to work with families to create customized learning plans called Individualized Education Plans (IEPs) for special needs students. This was the first instance of government requiring public education to provide students with a customized education, and the results have been mixed. For many families, the IEP process works well. Others feel schools and school districts erroneously deny students needed services, leading to contentious appeals that sometimes result in litigation.  

 Despite these tensions in the IEP process, I suspect most ESA administrators will eventually use certified educators and accredited public and private educational institutions, with the assistance of Artificial Intelligence (AI) and Machine Learning (ML), to help determine which ESA purchases are appropriate for each student. This approach should be less contentious than the IEP process since ESA families must use their students’ ESA funds, and not school district resources, to pay for services. This includes any services their students receive from school district staff. 

 Reimbursements and transactional friction 

In some ESA states, families may purchase pre-approved educational products and services through an e-commerce site or use their personal funds and submit receipts to their state’s ESA administrator to get reimbursed. Reimbursements provide families with access to products and services not included on their state’s e-commerce site and allow for timely purchases. If a student needs materials to finish a science project that is due tomorrow, the family can make an out-of-pocket purchase and hope to get reimbursed.  

 While reimbursements provide families with purchasing flexibility, they come with complexities that generate transactional friction. Families must submit receipts showing each purchased item and its cost. These receipts are sometimes blurry and difficult to read, or the item descriptions are too vague for ESA administrators to determine whether they are eligible, requiring families to spend time getting new receipts. 

Determining a service provider’s eligibility to receive ESA funds also often complicates reimbursements. A family may think a speech therapist is eligible to be compensated by ESA funds, but when they submit a receipt, the ESA administrator has no record of the therapist’s license. This causes delays while the therapist submits her current state license to the ESA administrator to establish or reestablish eligibility. Many families cannot afford waiting several weeks to get reimbursed or pay the additional credit card interest caused by these delays. 

To reduce and eventually eliminate reimbursements, some ESA administrators are exploring creating standardized commodity codes that will enable families to buy pre-approved educational products and services using debit cards. This solution, which will probably take a few years to fully implement nationally, will be like Health Savings Account (HSA) cards. If enough states join this effort their collective market size should be sufficient to convince most vendors to participate.  

In the interim some states are using or preparing to use technology such as Optical Character Recognition (OCR) and Artificial Intelligence (AI) to automate reimbursement processing. This automation will expedite the processing of reimbursements that do not require an educator to determine if a purchase is appropriate for a specific student. 

Arizona is using risk-based auditing to accelerate its reimbursement processing. This involves automatically approving all ESA purchases under $2,000 and then auditing those purchases that have a significant probability of being ineligible. If an audit determines a purchase is ineligible the family must repay their ESA account. And in Florida, Step Up For Students is making excellent progress processing reimbursements more effectively and efficiently using technology and better workflow processes. 

These interim solutions are an important bridge to a future in which debit cards and statewide networks of certified educators and accredited educational institutions enable public education to provide an effective and efficient customized education to millions of students with little unnecessary transactional friction. 

Some transactional friction will always exist in public education, and it should. How well we manage this friction will help determine how successful we are.  


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BY Doug Tuthill

A lifelong educator, Tuthill was President of Step Up For Students from 2008-2024 and is  now Step Up’s Chief Vision Officer.