More states are now giving money to families who pull their kids out of public school, creating a pot that can be spent on online learning and microschool programs.

Emma Whitford, Forbes Staff

In September, Sandra Testo pulled her 14-year-old son, Keaton, out of his public middle school in Trinity, Florida—a response, she says, to years of bullying that had left him so anxious he ended up routinely hiding out in the school nurse’s office. Keaton now spends his days at home, completing his 8th grade coursework via Outschool, an online learning platform that offers live virtual classes for K-12 students. On Tuesdays, he attends a Christian co-op with other kids his age to study art and play basketball. “It’s been the best thing,” Sandra Testo says. “His demeanor has changed. He’s just so calm now.” Testo pays about $300 per month for Outschool from an educational savings account (ESA) funded by Florida.

Homeschooling is booming for a variety of reasons, but chief among them are dissatisfaction with public schools that spiked during the Covid-19 pandemic and $5 billion a year (and growing) of state stipends for families opting for public school alternatives. Those can include traditional private schools, online classes, homeschooling and microschools—networks of in-person learning “pods” with one teacher and a dozen to two dozen kids, often using online courses.

It all adds up to a growing parent-driven market for the edtech industry, says Michael Moe, founder and CEO of GSV Ventures, which backs educational startups. “Personally, I think the most exciting opportunity is in microschools, but homeschool, charter schools, low-cost private schools and virtual charter schools are all positioned well for this coming boom,” he says.

In 2019, before the pandemic, 3.7% of children aged 5 to 17 were schooled primarily at home either by parents or through virtual classes, up from 2% in 1999, according to a survey by the National Center for Education Statistics, which attributes that increase in part to information technology making home instruction more feasible. The NCES doesn’t have more recent data yet, but an analysis by the Washington Post found the number of homeschooled children has surged 51% since the 2017-18 school year. Meanwhile, private school enrollment rose just 7% while public school enrollment declined 4%. The big spurt in homeschooling came during the 2019-2020 and 2020-2021 school years, when virtual classes and mask mandates were widespread. Since then, as public schools have returned to (more or less) normal, homeschooling numbers have dropped some, but held on to much of their pandemic era gains. Notably, some of the students who fled public school for home during the pandemic are now enrolling in microschools.

A poll conducted in August for the Post found homeschooling has spread well beyond the Christian conservatives most associated with the movement in recent decades. These days, homeschooling families increasingly cite anxiety over school safety (including bullying and violence) as well as a belief that what is available online is better than the instruction in local public schools, with a majority now using online live or recorded classes.

This parent-driven opportunity is a rare bright spot for an edtech industry still struggling through the bust that followed its Covid boom. Funding for U.S. edtech startups in 2023 totaled $3.2 billion, down dramatically from the $9.5 billion raised in 2022 and $20.3 billion in 2021, according to data from Crunchbase. (In 2019, before the pandemic, the industry received $2.2 billion in investment.) The Covid-era funding frenzy came as three federal stimulus packages showered $190 billion on K-12 schools—money was spent on everything from beefing up technology for online learning, to making schools physically safer, to mental health supports and catch-up instruction for students. (Schools must spend their final Covid dollars by this coming September.)

As the federal windfall ends, new money to support the parent-driven boomlet is coming from state-funded educational savings accounts. Back in 2020, there were just four state ESA programs serving about 25,000 children and doling out around $100 million annually, says Joe Connor, founder and CEO of Odyssey, a platform that aims to connect state ESA programs with parents and education vendors. Today, 13 states have programs (some have more than one program, with different eligibility and funding) providing $5 billion a year to parents, he says. Those numbers are likely to grow. The National Conference of State Legislatures reports 33 state legislatures considered ESA programs last year and that it is now tracking nearly 100 such proposals.

To learn more about each state’s ESA programs, visit their websites: Arizona, Arkansas, Florida, Indiana, Iowa, Mississippi, Missouri (grant program), Missouri (ESA), New Hampshire, North Carolina, South Carolina, Tennessee (universal), Tennessee (for students with disabilities), Utah, West Virginia

Arkansas ESA eligibility: Resident K-12 children who are first time kindergarteners or have a disability, are experiencing homelessness, are or were in foster care, are children of active-duty military personnel or come from the lowest rated schools or district.

Tennessee ESA eligibility for students with disabilities: Resident K-12 students with an active Individualized Education Program and one of the qualifying disabilities listed in the 2023-24 account holder handbook.

West Virginia ESA eligibility: All resident K-12 students who are eligible to be enrolled in kindergarten for the 2023-24 school year; are enrolled full-time in a West Virginia public elementary or secondary school for the preceding academic year; or enrolled full-time and attending a public elementary or secondary school in West Virginia for at least 45 consecutive calendar days during the current instructional term at the time of application.

In August 2022, Melissa Shah, a Gilbert, Arizona mother of three, used a state funded ESA to enroll her now 16-year-old son into a KaiPod microschool. He’s neurodiverse and excels at math, but struggles with writing and reading comprehension. “Being able to customize your child’s education allows both the child and the family to increase their quality of life,” Shah says. “My son is finally feeling challenged in math, but it took until 11th grade. He spent so many years being bored in this subject, but not until we moved to an accelerated online private school paired with KaiPod Learning did he really shine.” Her son is now making plans to attend college—something Shah doesn’t think he would have considered without the opportunity he’s now had to forge his own educational path.

While ESAs are clearly boosting the money available to parents, Amar Kumar, founder of Boston-based KaiPod, argues they’re actually a “lagging indication” of growing parental demands for more control over their children’s education. “The way I see it is—ESAs follow what’s happening on the ground. As more and more families are saying, ‘Hey, I want to tailor my child’s education the way I see fit,’ that’s when politicians come on board and say, ‘Okay, then you should be able to use your tax dollars to do that.’”

Since launching in 2021 with seed funding from Y Combinator and EO Ventures, among others, KaiPod has helped independent teachers set up 49 pods and has opened 19 of its own company-run pods across five states. About half its current students were homeschooled before enrolling, while another quarter brought their full-time online schooling curriculum to KaiPod and the last quarter left traditional public or private schools, Kumar says. Each pod is typically made up of 12 to 14 students and one educator. The pod covers a range of school subjects—from math to reading to science—with each student following their own self-paced and family-selected curriculum. Tuition prices vary by pod. In Nashua, New Hampshire, a five-day, Monday through Friday plan costs $6,600 per academic year. In Rosewell, Georgia, the same plan costs parents $9,000 per year. Parents also have the option to purchase two, three or four-day plans at most locations.

If parents have not already settled on a homeschooling curriculum, KaiPod helps them construct one. “So they may choose an a la carte approach of curriculum—Khan Academy for Math or Lexia for reading or something else for science,’’ Kumar says. “And then they come to the Kai pod three, four or five days a week to do all the other things and have a safe place to work.”

Outschool, a San Francisco-based online learning service, has seen a surge in business from ESAs, with the number of users paying with the accounts growing six fold in 2023, reports founder and CEO Amir Nathoo. Over the course of 2023, Outschools’ weekly receipts from ESA funds increased from tens of thousands of dollars to hundreds of thousands, he says. Currently, about half of the 100,000 monthly users of the platform are homeschooled, while others use it to supplement their public or private education. (The service, which was launched from the 2016 Y Combinator class, raised $110 million at a $3 billion valuation in 2021, bringing its total funding to $242 million from more than two dozen investors.)

Tony Wan, head of platform at Reach Capital, an education-focused VC firm that has invested in Outschool, cites state funded ESAs as one of the most important K-12 education trends to watch this year. “We anticipate demand for ESAs to grow as parents continue to seek alternatives for their children who they feel are not well served by existing and local options,” offers Wan, whose firm has also invested in other companies that sell to parents, such as tutoring platform Preply.

“We’ve seen (the number of) prospective customers that ask about paying with ESAs and other government funding increase dramatically,” reports Felipe Izquierdo, Founder and CEO of San Francisco-based Quest, which uses online games to teach math to pre-teens. He sees this as a big area of growth for his year-old startup, which now has 500 customers. So too does Garrett Smiley, the cofounder and CEO of Sora Schools, a New York-based virtual accredited private middle and high school that expects to increase its enrollment to 1,000 next academic year, from 335 now.

While ESA proposals have engendered big political fights in some states and so far have only been adopted by Republican controlled states, they seem to enjoy broader public support than the older private school voucher model. In a July survey for the Hunt Institute of 1,300 likely 2024 voters, 56% of respondents said they support spending taxpayer dollars on education savings accounts, compared to 49% who said the same for vouchers. (The Hunt Institute, which is affiliated with Duke University’s Sanford School of Public Policy, has received funding from the foundations of Amazon founder Jeff Bezos and Microsoft cofounder Bill Gates and his ex-wife Melinda French Gates and from Meta cofounder Mark Zuckerberg and his wife Priscilla Chan.)

Which students qualify for ESAs, how much they get and what parents can spend the money on varies widely from program to program. Montana and North Carolina have launched accounts just for students with special needs. New Hampshire established its ESA in 2021 for families with 350% or less of the poverty rate (a household income of $105,000 or less for a family of four). The accounts are not popular with teachers’ unions. The American Federation of Teachers-New Hampshire sued to block the program, claiming it violates the state constitution because it is partially funded through the state’s lottery program, whose earnings are earmarked exclusively for state aid to education. In November, a Superior Court judge dismissed the lawsuit.

West Virginia’s Hope Scholarship program, launched in 2022, and recently upheld by the state’s Supreme Court, provides accounts (equal to the state’s per capita contribution to local public schools) only to students who had previously been enrolled in public schools or are just starting kindergarten. This year, the accounts provide $4,489 to eligible students to pay for tuition, homeschooling curriculum and other expenses for individualized education. But the legislation could eventually make the accounts more widely available.

That’s in line with a trend toward wider eligibility. Arkansas, for example, launched ESAs this year with eligibility restricted to certain students, such as those with disabilities or fleeing the lowest ranked public schools, with total participation capped. The accounts are equal to 90% of the state’s per capita student funding for the prior year for public schools—that translates to $6,600 this year. But by the 2025-2026 school year, the state plans to make the accounts available to all students who want to leave public school.

“Generally, states want to make sure that the programs are up and running and that there is no fraud, waste and abuse before they expand the categories,” Connor observes. “But I think if you step back, generally the policy is to empower parents. And historically what we’ve seen is an expansion of what that means rather than a contraction.”

Arizona’s “empowerment scholarship accounts” were first established in 2011 for students with disabilities. For the 2022-23 academic year, children with disabilities were eligible for up to $43,000 in ESA funding, depending on their disability. But in 2022 the state made smaller accounts (now ranging from $6,000 to $9,000, depending on how much state aid would have been paid to a public or charter school system if the student had been enrolled) available to any non-disabled resident K-12 student regardless of family income, so long as they’re not enrolled in public schools or publicly funded charter schools. Parents can spend the money on private school tuition, curriculum, home education or tutoring, to name a few things. (This is separate from Arizona’s tax-credit subsidized voucher program for private schools and families can’t qualify for both.)

Connor’s Odyssey works with ESA programs in Idaho, Missouri and Iowa, and operates an online marketplace where parents can purchase pre-approved educational services for their children. After the programs are up and running, he sees a spike in interest from education vendors who want in on the action. “Once money actually starts flowing to the parents, and parents are purchasing things, we typically see that is when vendors—some tutoring centers, afterschool programs, music programs—get very interested in it, because now it’s a potential source of business and revenue for them,” he says.

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