Understanding the Department of Education's Finances

The Department of Education (ED) plays a crucial role in shaping education in the United States. This article provides an overview of the department's financial aspects, including funding sources, allocation methods, and spending trends.

The Role of the Department of Education

The Department of Education (ED) is a cabinet-level executive branch agency responsible for overseeing education policy and administering funding for programs and individuals. Established in 1980 after a reorganization of the Department of Health, Education, and Welfare, the ED supports state and local education systems, promotes educational equity, and provides grants and loans to higher education institutions and students.

Sources of Education Funding

Public schools, from kindergarten through 12th grade (K-12), are financed through a mix of local, state, and federal funds. While state and local governments contribute the majority (87 percent) of K-12 education funding, the federal government also plays a significant role, typically providing around 8-10% of total education funding. This percentage can fluctuate in response to specific events, such as the Great Recession and the COVID-19 pandemic, when federal contributions increased.

State and Local Funding

State governments use formulas to distribute education funds among school districts, which then combine these funds with local revenue and federal grants to support individual schools. Local funding primarily comes from property taxes, which can lead to disparities between wealthier and poorer districts.

Federal Funding

The federal government supplements state and local resources through specific grant programs designed to support schools with at-risk youth, including students with disabilities or from low-income households. These programs aim to narrow funding gaps and promote equitable access to education.

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Federal Funding Mechanisms

The Department of Education allocates funds through two primary types of grants: formula grants and competitive grants.

Formula Grants

Formula grants are allocated based on formulas established by Congress in law. These grants are often referred to by the section of the law that created them, such as "Title I," which provides funds for schools in low-income communities. Every state receives federal formula funding, which the department typically allocates to states, who then allocate to districts. However, this is not always the case.

Key Formula Grants

Title I, Part A - Improving Basic Programs: Supports high-poverty schools and school improvement initiatives. The allocation to states utilizes four different formulas that weight census poverty data, state per-pupil expenditures, and population factors for children aged 5-17 from low-income families. In FY 2025, this grant amounted to $18.4 billion.
Grants for State Assessments: Supports high-quality assessments. Allocations to states are based on the share of the population of children aged 5-17. In FY 2025, this grant amounted to $0.380 billion.
Title II, Part A - Supporting Effective Instruction: Supports effective instruction at the state and local levels. 80% of the funds are allocated based on poverty and 20% based on the population of children aged 5-17. In FY 2025, this grant amounted to $2.2 billion.
Title IV, Part A - Student Support and Academic Enrichment: Supports student support and academic enrichment programs. The same formula as Title I, Part A, is used for allocation. In FY 2025, this grant amounted to $1.4 billion.
Title IV, Part B - 21st Century Community Learning Centers: Supports community learning centers. The same formula as Title I, Part A, is used for allocation to states, while within the state, allocation is competitive. In FY 2025, this grant amounted to $1.3 billion.
Impact Aid - Title VII: Supports local educational agencies (LEAs) based on the number of federally connected children and tax-exempt federal property. Funds do not go to states. In FY 2025, this grant amounted to $1.6 billion.
Perkins V - Career and Technical Education (CTE) Basic State Grants: Supports career and technical education programs. Allocations to states are based on the population aged 15-19 and per capita income.

Competitive Grants

Competitive grants, also known as "discretionary" grants, are allocated through grant competitions that require detailed applications. These applications are reviewed by outside peer reviewers and awarded points based on a framework set by statute and regulations. New administrations often set priorities that apply across relevant competitive grant programs. The (or SEED) grant is an example of a competitive grant.

Timing of Allocations

Most formula grants are awarded at specific times of the year, typically in two tranches on July 1 and October 1. Many formula grants are "forward funded," meaning funds are allocated late in the budget year and carried into at least one following fiscal year. This gives districts more time to plan and spend funds. In general, about 90% of federal K-12 spending is allocated via formula grants.

Department of Education Spending Trends

In FY 2024, the Department of Education spent $268.4 billion, which was 4% of the $6.78 trillion in overall federal spending. This ranked the department 6th among federal agencies in total spending. Adjusting for inflation, the Department of Education’s federal spending has increased from $56.9 billion in 1980 to $268.4 billion in 2024. Since 1980, the Department of Education's spending has increased 371.6%, while overall spending has increased 193.7%.

In FY 2024, approximately $43 billion was allocated by formula grants, compared with about $2 billion in competitive grants. The total funding from the Department of Education to support K-12 students was $45 billion in fiscal year 2025.

Factors Affecting Spending

Federal spending can shift over time due to population growth, changes in policy and programs, and emerging issues. Major legislation, economic conditions, and events like the COVID-19 pandemic can also significantly affect spending year to year.

Direct vs. Indirect Spending

Most federal spending can be categorized as direct or indirect. Direct spending includes money spent on federal programs, employee salaries, and debt interest. Indirect spending refers to federal transfers to state and local governments. In FY 2024, the Department of Education transferred 25.4% of its total spending to states and local governments.

Department of Education Workforce

As of September 2024, approximately 4,209 of the 2.31 million total civilian federal employees work for the Department of Education. This is 6.5% more people than the department staffed in 2010. ED accounts for 0.2% of the overall federal workforce.

Challenges and Disparities in Education Funding

Despite efforts to distribute funding equitably, disparities persist across and within states. These disparities are driven by differences in the cost of education, the ability and willingness of districts to spend money on education, and reliance on local property taxes.

Inequitable School Funding

Public schools in the United States are among the most inequitably funded of any industrialized nation. Schools and districts experience significant funding disparities due to the reliance on local property taxes. State funding rarely equalizes these disparities. On average, school districts serving the highest proportions of students of color receive $2,700 less per student in state and local funding compared to those with the fewest students of color.

Rising Costs and Growing Needs

The rising costs of health care and pensions, along with a growing population of low-income, special education, homeless, and English learner students, present urgent challenges to the education system. School districts must stretch their limited resources to educate students in safe and enriching environments.

The Texas Example

Texas, with the second-largest public education system in the country, exemplifies the complexities of school funding. During the 89th Legislative Session in 2025, lawmakers passed House Bill 2 (HB 2), providing $8.5 billion in new school funding. However, a significant funding gap still exists.

Texas Funding System

In Texas, an equalized system ensures that if a local school cannot generate enough local property tax revenue to meet the per-student funding amount set by the legislature, the state provides the remaining funds. The primary sources of public school funding are local property taxes and various state funds.

Per-Student Funding

The basic allotment in Texas saw an increase of $55 per student annually during the 89th Legislative Session, increasing it from $6,160 to $6,215 per student. Considering all funding sources, the average school district in Texas receives about $11,500 per student per year.

Challenges in Texas

Despite a thriving economy and population growth, Texas ranks in the bottom 10 states nationally for state spending on education. This underinvestment can impact the state's ability to compete for qualified teachers and exceptional workforce programs.

The Impact of Funding on Student Outcomes

Research shows that well-allocated increases in education funding improve student outcomes. Federal pandemic relief funding had positive effects on student achievement. Studies have also shown that funding from the federal Title I program correlates with increased educational attainment, higher high school graduation rates, and improved earnings and work hours in adulthood.

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