As the last pandemic-era school stimulus funding dries up, many districts and the companies that serve them are unprepared for the budgetary impact. Some spending categories are clear targets for cuts, but the funding had a knock-on effect across budgets that can be harder for investors to spot.
By the end of January 2025, districts had spent the last Elementary and Secondary School Emergency Relief (ESSER) funds, a total of about $190 billion, and the largest inflow of federal K-12 funding in decades. This was equivalent to 30% to 40% of a typical district’s discretionary spending over the life of the funding.
Many districts now face a funding cliff. The belt-tightening comes as fixed costs continue to rise, enrollments decline, teacher shortages persist, and go-forward federal education policy remains in flux.
Despite uncertainty, we expect several K-12 categories to remain funded — or even experience a funding bump — in the year ahead. Companies and investors can benefit from keeping the following guidelines in mind as they adjust their go-to-market and portfolio strategies.
How stimulus funds impacted K-12 budgets
ESSER funds — authorized by three laws aimed at addressing pandemic challenges — were distributed between 2020 and 2024 in line with the Title I funding formula. Districts with high rates of poverty received more funding. Districts also had broad leeway in how they spent the funds.
Early in the pandemic, many districts invested in technology as they moved to online or hybrid learning. Later rounds of spending commonly added or expanded programs and staffing to address learning loss, absenteeism, and mental health challenges, as well as to support groups that typically receive fewer resources, including students from low-income families or multi-language learners.
ESSER funding benefited companies such as tutoring services that got a boost from efforts to stem learning loss. In addition, the sheer amount of funding meant many districts increased spending in areas not directly related to the pandemic — supplemental curriculum and professional development are two examples. Companies in segments that have not established “need to have” positions will likely face funding challenges now.
On the other hand, some K-12 segments will likely be insulated from budget cuts and could potentially benefit from policy changes going forward. For example, regulatory requirements broadly protect spending for certain student populations, and companies serving these segments should experience fewer headwinds. Sectors funded through other avenues, such as bonds, should not expect a funding pullback as issuances have increased. Finally, private schools were less reliant on ESSER funding and would not experience the same budget tightening. In addition, the current administration’s potential support of school choice and vouchers might give them a boost.
Four critical factors when evaluating K-12 investments
As districts begin to assess how ESSER funding rippled through their overall budgets, investors should key four key factors in mind to uncover categories of essential spending that will continue to receive priority.
Regulations and legislation protect spending in several K-12 segments
Federal regulatory requirements associated with the Individuals with Disabilities in Education Act (IDEA) will protect funding for special education students and insulate companies that serve these students from budget cuts. Companies that provide staffing — both teachers and clinicians — for special education students are well situated because IDEA requires that services specified in a student’s Individualized Education Plan be delivered. Companies that provide curriculum or other resources and services, such as transportation, for special education students are likely protected as well.
Other categories protected by legislation are companies offering solutions that allow schools to comply with security and safety regulations, such as providing background checks or emergency response solutions, as well as those related to digital privacy. A caveat: changes in federal regulations might shift the landscape, weakening or eliminating some guidelines or creating a market for new services or initiatives.
Finally, individual states have regulations for curriculum materials — such as the science of reading for literacy instruction or the high-quality instructional materials and professional development legislation that supports literacy and math instruction — that also create safer havens for companies that meet those standards.
Need-to-have core services in K-12 remain unaffected by budget cuts
Certain categories are integral to the operation of a school itself and will remain untouched. Districts will continue to rely on student information systems, learning management systems, and regulatory compliance software. However, these categories are already highly penetrated, so growth will be more difficult.
Another need-to-have segment is IT services, especially as many K-12 districts lack internal technology staff and have been unable to keep up with the explosive growth of digital solutions embedded in the school day.
Schools are still recovering from the “mass resignation” during the pandemic and increasingly rely on staffing agencies and service providers to help them fill open positions. Staffing companies are well situated because structural teacher shortages are persistent, and the positions they fill are in districts’ operating budgets.
Companies that provide core curriculum materials are generally more immune from budget cuts than supplemental material providers. Additionally, the pandemic disrupted the core curriculum buying cycle for many districts, so we anticipate a bit of catch-up spending is required, providing additional support for the segment.
K-12 programs that generate revenue will see continued growth
As budgets get squeezed and districts must replace lost funding or eliminate resources, programs or services that create incremental revenue for a district will have an advantage. We anticipate continued growth for companies that provide before- and after-school program services when districts charge parents for them; payments platforms that help districts capture and manage the increasing array of student fees they are charging; Medicaid reimbursement platforms that help ensure districts collect all the support their students are eligible for; and drop-out prevention and recovery service providers that help districts maintain retain students and associated variable funding.
Quality will be the key differentiator in K-12 investments
Regardless of a product’s category, quality will be paramount as budgets contract. Districts will eliminate or reduce spending on duplicative services or programs, and quality will be the critical differentiator between those that are cut and those that are funded. In our experience, companies that focus on a customer success model that encourages use tend to be in the best position.
After several years of stimulus funds that transformed school district budgets — and the prospects of companies serving K-12 — the landscape is shifting. Districts must now adjust to the loss of a significant portion of their budgets, and investors need to consider the end of the ESSER era as they evaluate K-12 education assets.
