Fiscal Analysis: How Arkansas’ Education Freedom Account program is impacting taxpayers and students

Introduction

Arkansas enacted the Literacy, Empowerment, Accountability, Readiness, Networking, and School Safety (LEARNS) Act in 2023. This new K-12 education law changed the state K-12 curriculum and prioritized new funding for teacher raises, school safety, broadband access, and other purposes. A key feature of the new law adopted the Educational Freedom Account (EFA) program. This program allows families who don’t use public schools to receive state funds for education expenses like private school tuition, tutoring services, testing fees, and educational supplies. By adopting the EFA program, Arkansas became the 11th state in the nation to adopt a universal school choice initiative—meaning it will be eligible to all resident students at full implementation.

As expansive school choice programs proliferate nationwide, tens of thousands of families are newly gaining access to education options outside of the traditional public school system. At the same time, lawmakers and other stakeholders want to know how these programs will impact their state’s budget. For each participating student who would have otherwise enrolled in an Arkansas public school, the state’s EFA program generates about 10% in net state savings because EFA scholarship values are 90% of per-student public school formula funding from the prior year. On the other hand, EFA students already using private education represent a pure cost to the state because they weren’t previously receiving any public resources. This column analyzes how these savings and costs counterbalance one another and estimates the net fiscal impact on the state’s K-12 education budget.

Executive summary

• Scholarship amounts for the EFA are equal to 90% of per-student state funding formula dollars from the prior year. Those amounts were $6,672 in year one, $6,856 in year two, and an estimated $6,994 in year three.
• Eligibility was limited to specific populations and high-need students in the first two years (2023-24 and 2024-25). This includes students with disabilities, in foster care, in low-performing public schools, and kindergarteners. The EFA program will be available to all Arkansas families starting in the 2025-26 school year.
• The estimated share of participating students who would have otherwise attended public school in Arkansas’s EFA program—or the switcher rate—was 34.8% in the first year and 27.5% by the second year. These students saved the state $17.2 million in year one and $30.6 million in year two.
• Accounting for total program costs and offsetting savings from switcher students, the net state budget cost of the EFA was $20.3 million in year one (0.3% of the total state budget) and $67.7 million in year two (1.1% of the total state budget).
• Based on data from universal school choice policies in other states, the net state cost of Arkansas’s EFA in year three will range between a high-end estimate of $209.2 million (3.3% of the governor’s proposed budget) and a low-end estimate of $126.9 million (2% of the total proposed state budget).
• The net cost projections indicate that the state’s universal program will be affordable. The net cost of Arkansas’s EFA at full implementation will be comparable to the routine annual increases given to the state’s public schools.
• Data from other states suggest that the net cost of the EFA program will peak at $263 million annually in the first few years of universal eligibility and decrease over the medium and long term.
• The net costs of funding expansive, universal school choice in Arkansas should also be considered against the benefits of empowering tens of thousands of families statewide with more educational options.

Program design and student eligibility

The LEARNS law dictates a three-year timeline for the EFA program to be phased into universal eligibility. The law allows only applicants under specific eligibility criteria for the first two years and then expands to universal eligibility by the 2025-2026 school year.

• Year 1 (2023-2024): In the first year of the EFA, applications were only available for students with disabilities, first-time kindergarteners, children in foster care, children in active-duty military families, homeless students, and children coming from F-rated public schools or Level 5 school districts (the lowest performing schools, as determined by the state). Students previously participating in the Succeed Scholarship program were also eligible. The number of participants in year one was capped at an amount equal to 1.5% of the state’s public school population.
• Year 2 (2024-2025): In the second year of the EFA, applications were available to all students eligible in year one and expanded eligibility to include first-graders and students in D-rated public schools. It also expanded to include children of veteran parents, parents in the military reserves, first responders, and law enforcement officers. Additionally, allowable uses for the EFA broadened to include the kinds of expenses typically incurred by homeschooling families—which effectively made those families newly eligible. The number of participants in year two is capped at an amount equal to 3% of the state’s public school population.
• Year 3 (2025-2026): By year three, the EFA will be available to all school-age children in Arkansas. Participation will only be limited by the amount of funds appropriated for the program. Under the governor’s current proposed budget, a maximum of 39,600 students would be eligible to participate in the program. Scholarship amounts would be an estimated $6,994 per participant.

Fiscal analysis

Methodology

To measure Arkansas’s school choice program’s net fiscal impact on the state budget, one must estimate both the total program costs and the offsetting savings from students who would have otherwise attended public schools. Four key variables are required to determine this net fiscal impact.

1. Scholarship amounts per student: The amount of funds each choice program participant receives. For years one through three of the EFA, students respectively receive $6,672, $6,856, and $6,994 each. Additionally, a small number of students previously participating in the Succeed Scholarship program receive $7,413 each.
2. Total program enrollment: The total number of students participating in the school choice program.
3. Portable public education funding per student: The amount of funding a school district loses when a student leaves the public education system to participate in the choice program. For clarity, this analysis will only consider Arkansas’s public school per-student formula funds as portable funds. In years one through three of the EFA, those amounts were, respectively, $7,618, $7,771, and an estimated $8,162 per student.
4. Switcher rates: The share of choice program participants that would have otherwise enrolled in a public school.

Year 1 fiscal analysis

The Arkansas Department of Elementary and Secondary Education (ADESE) published complete student participation data for year one of the EFA program. In 2023-2024, there were 5,548 total EFA users. Participants received $6,672 each unless they were previously enrolled in the Succeed Scholarship program, in which case they received $7,413. The state-reported total cost of the EFA in year one was $34.9 million.

EFA users who would have otherwise attended public schools generate state savings that counterbalance some of the total cost. Of the total participants, 630 came from the Succeed Scholarship program, and an estimated 18%—999 students—were enrolled in public schools in the immediate prior year. Because prior Succeed Scholarship participants were required to be previously enrolled in public schools to be eligible for the program, they are also counted as switchers. That means 1,629—or 29.4%—of EFA program users in year one were switchers.

One further adjustment is needed. The 29.4% switcher figure likely understates the true switcher rate of Arkansas’s EFA program because it counts all 1,664 kindergarten participants as non-switchers because it’s their first year of formal education. Because it’s impossible to know how many kindergarten enrollees would have otherwise attended public schools, this analysis assumes that the same share of kindergarten participants (18%) as total program participants would have been switchers.

After applying the switcher assumption to kindergarten EFA enrollees, the final estimate for the number of switchers for year one of Arkansas’s EFA program is 1,928, or 34.8%. By not attending public schools, each switcher student saves the state $7,618 in funding formula dollars. Therefore, switchers generated a total savings of $17.2 million to the state. After accounting for these offsetting savings, the estimated net cost of Arkansas’s EFA program in year one was $17.7 million. That amount equals 0.3% of the total state budget in the same year.

Year 2 fiscal analysis

ADESE has only published limited participation data for year two of the EFA program. In 2024-2025, 90% of students participating in year one continued using the program in year two. Under the expanded eligibility criteria and higher enrollment cap, about 9,300 additional students were added to the program. As such, there were 14,297 students using the EFA in the 2024-2025 school year. They received $6,856 each, with previous Succeed Scholarship recipients still receiving $7,413. For year two, the total cost of the EFA program was $97.5 million.

ADESE has not yet published more detailed information on student participation by eligibility group or switcher rates for year two. However, the Arkansas Times obtained and published year two participation data via a Freedom of Information Act request.

According to the data obtained by the Arkansas Times, 18% of all enrollees after the first two years of applications were previously enrolled in traditional public or charter schools. That share is equal to about 2,573 participants. Like year one, a further adjustment is needed to estimate how many kindergarteners would have otherwise attended public school. About 31% or 4,432 EFA participants enrolled under kindergarten eligibility. Again, assuming an 18% switcher rate, an estimated 798 of them are switchers. When combining that switcher amount with an estimated 567 former Succeed Scholarship recipients (adjusted to a 90% figure due to the retention rate from the prior year), there were an estimated 3,938 switchers in year two of the EFA program or 27.5% of participants.

In public schools, each switcher student would have received $7,771 each through the state funding formula in 2024-2025. Therefore, switchers generate a total savings of $30.6 million to the state. After accounting for these offsetting savings, the estimated net cost of Arkansas’s EFA program in year two was $66.9 million. That amount equals 1.1% of the total state budget that year.

Year 3 fiscal projection

Since applications have not yet been collected, participation data for year three of Arkansas’s EFA program is unavailable. Because the EFA expands to universal eligibility in the third year, policymakers and researchers expect a large increase in participation. Anticipating this application surge, Gov. Sarah Huckabee Sanders has proposed doubling the state’s EFA budget from the prior year, raising it to $187.5 million and adding another $90 million in surplus revenues in case program demand is higher ($277.5 million in total). If both appropriations are approved, that new amount would fund about 39,600 scholarships at $6,994 each.

Like years one and two, estimating the net fiscal impact of the state’s EFA requires calculating the total cost and offsetting savings from participants who would have otherwise attended public schools. Although Arkansas-specific data is not yet available, participation and switcher data from other states that have adopted universal school choice programs can be used to formulate projections.

Differences in policy design and school choice context make each state program unique. Arizona is the state most analogous to year three of Arkansas’s EFA program. That’s because Arizona had no eligibility restrictions on applications in its first year of expansion into universal eligibility (2022-2023), just as Arkansas’s EFA program will be in year three. In the Arizona program’s first year, the state reported that 21% of about 30,000 participants in first through twelfth grades were previously enrolled in Arizona public schools. By year two, the overall switcher rate had risen to 32%. A separate Reason Foundation analysis estimates that, after accounting for kindergarten participants and Arizona program participants who previously enrolled in the ESA before it became universal, the switcher rate after two full program years was 47%.

Even so, all three of these percentages likely still understate the true switcher rate in Arizona since it had four already-established private school choice programs that likely served substantial shares of switcher students. Out of caution, this analysis will exclude any consideration of additional Arizona ESA students who were switchers who may have transferred from these programs.

Thus, this analysis will include a range of cost estimates based on switcher rates of 21%, 32%, and 47%.

Year 3 fiscal projections under maximum participation

If the total $277.5 million in funding in Gov. Sanders’s proposed budget is used by Arkansas students in year three of the EFA program, a reported 39,600 students would be participating. If the program switcher rate is at the low end of 21%, there would be 8,356 switchers yielding $68.2 million in counterbalancing savings. Thus, the net state budget cost under the low-end switcher estimate would be $209.3 million.

If switcher rates are at the mid-level rate of 32%, there would be 12,553 switchers yielding $102.5 million in counterbalancing savings. Thus, the net state budget cost under the mid-level switcher estimate would be $175.0 million.

If switcher rates are at the high-end rate of 47%, there would be 18,454 switchers yielding $150.6 million in counterbalancing savings. Thus, the net state budget cost under the high-end switcher estimate would be $126.9 million.

Table 1: Net State Budget Cost of Arkansas EFA Program Under Maximum Participation, by School Year

Program Year	2023-24	2024-25	2025-26 (21% Switcher Projection)	2025-26 (32% Switcher Projection)	2025-26 (47% Switcher Projection)
Total EFA Participants	5,548	14,297	39,600	39,600	39,600
Switchers	1,928	3,938	8,356	12,553	18,454
Non-Switchers	3,620	10,359	31,244	27,047	21,146
Switcher Rate	35%	28%	21%	32%	47%
Total Cost	$34.9m	$97.5m	$277.5m	$277.5m	$277.5m
Switcher Savings	$17.2m	$30.6m	$68.2m	$102.5m	$150.6m
Net Annual Cost	$17.7m	$66.9m	$209.3m	$175.0m	$126.9m

Year 3 fiscal projections excluding proposed reserves

It’s also possible that EFA applications won’t meet the full 39,600 scholarship amount available under the governor’s proposed budget in the program’s first year of universal eligibility. Although it’s reasonable to assume that a large majority of families already using non-public education would enroll in the EFA soon after becoming eligible, there are reasons why some or many families may not participate. First, not all Arkansas private schools have opted to participate so far. While a reported 128 private schools accepted EFA students this school year, Private School Review reports that there are currently 191 private schools in the state. If these schools don’t opt into the program in the coming year, the families they serve won’t be able to participate in the EFA program. Homeschooled families are also less incentivized to participate in school choice programs because they aren’t paying private school tuition, and their community has historically been skeptical of any government involvement in home education.

In a scenario where the governor’s proposed $90 million in EFA program reserves aren’t needed, the total EFA program cost would be $187.5 million. Under the same range of switcher assumptions adopted earlier in this analysis, the net cost of the program would range from $85.5 million to $141.3 million in year three.

Putting the costs in context

As this analysis illustrates, the Arkansas EFA program’s true cost (i.e., net cost) is substantially lower than its total cost. That’s because switchers generate substantial offsetting state fiscal savings that can account for as much as half of the total costs (see Figure 1).

Figure 1: True EFA Cost as a Share of Total Program Costs, FY24 through FY26

Moreover, even under the maximum proposed participation of 39,600 scholarships, the net costs of Arkansas’s EFA program are affordable when evaluated against the entire state budget. In the first two years, the net costs of the EFA program were at or below 1% of the total state budget. Based on projections for Arkansas’s EFA program at universal eligibility, the net costs of the program will likely amount to between 2% and 3.3% of the state’s proposed budget (see Figure 2).

Figure 2: Estimated Net Costs of Arkansas EFA Program as a Share of the Total State Budget, FY24 through FY26

The net costs of Arkansas’s school choice program under maximum proposed participation are comparable to the state’s routine public school spending increases. For comparison, during the first two years of the Arkansas EFA, public schools received about $168 million in new ongoing state formula funding and another $183 million in ongoing state funding to increase minimum teacher pay to $50,000 statewide. Arkansas also just completed its biennial public school funding formula review, where state analysts recommend further funding increases to the state legislature that are usually approved. The proposal would add at least $270 million in ongoing public school formula funding over the next two school years.

Importantly, the net cost of the EFA will likely peak in the program’s first few years of universal eligibility and subsequently decrease as larger shares of new EFA participants switch from public schools and increase the counterbalancing state savings. This is already occurring in Arizona, where most interested ESA participants who were already enrolled in private education joined the program in the first two years. Additionally, the share of total enrollees switching from Arizona public schools increased from 21% to 35% between FY23 and the first quarter of FY25.

Arkansas has about 30,000 students currently in private schools and another 33,000 homeschoolers. Assuming a peak share of 80% of the private school students and 50% of the homeschooled students participate in the EFA program over the next few years, the maximum amount of non-switcher EFA enrollees would be about 41,000. Assuming also a 32% program switcher rate by that point, the total program cost would be $418 million, and the net cost would be $262 million.

From the peak cost point, net program costs will likely stay flat or decrease even as total program costs climb. Few non-switchers will enroll in the EFA after that point because most interested families already using private education will have joined the program. Instead, new participants will largely come from public schools. Depending on how many public-school switcher students opt into the program in the coming years, the net cost of the program will decrease and stabilize between $253 million (assuming a 40% switcher rate) and $237 million (assuming a 50% switcher rate) annually. Note that these projected amounts are based on constant FY26 funding amounts. Figure 3 illustrates this long-term cost dynamic. While total program costs will likely grow as the program matures, net costs will be stable because most new enrollees are switchers.  

Figure 3: Trajectory of Net EFA Program Costs from Near-Term Peak to Long Term, in Constant FY26 Funding Amounts

To be sure, the timeline for achieving the peak, medium-and long-term program costs displayed in Figure 3 is speculative and could range from five to 10 years. For reference, achieving the long-term 50% switcher rate for the program under current assumptions would require 8.6% of the current public school population, about 41,000 students. In any case, the net program costs will remain stable over varying timelines of switcher rate increases.

As a few final notes, this analysis doesn’t account for other taxpayer savings that accrue over the long run as public schools scale back operations in response to declining enrollment. It also doesn’t account for any lags in state savings that result from Arkansas school districts using prior-year enrollment counts, nor does it account for declining enrollment funding received by some school districts when they lose students to the choice program.

Conclusion

Beyond state budget considerations, the costs of Arkansas’s Educational Freedom Accounts should be weighed against their benefits for student learning, parental involvement in education, and the K-12 education landscape. For example, 40% of participants in the program during the first two years were students with disabilities. This means that thousands of families with high-need children could choose another educational option outside of traditional public education. Thousands of additional young families were given new educational options right at the start of their children’s educational careers. State leaders should consider these families and the thousands more who want more options as they deliberate the budget for the first year of the EFA’s universal eligibility.

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Source: https://reason.org/commentary/fiscal-analysis-how-arkansas-education-freedom-account-program-is-impacting-taxpayers-and-students/