Tennessee has hired a Florida company to oversee online payment and application systems for its new education voucher program for some families in Memphis and Nashville.

ClassWallet started work on Nov. 4 after signing a two-year contract worth $2.53 million with the Department of Education, according to documents obtained by Chalkbeat.

The company becomes the major vendor managing Tennessee’s education savings account program, scheduled to launch for up to 5,000 students next school year under a new state law.

By next summer, millions of Tennessee taxpayer-funded dollars are projected to flow through the firm’s online platform, with money distributed to approved private schools and providers on behalf of eligible students whose families opt out of public schools in Memphis and Nashville. If that goes well, the company’s contract likely would be extended as the program grows to up to 15,000 students by the fifth year.

The firm does similar work for North Carolina and is in the process of taking over the payment system in Arizona, one of the first states to offer education savings accounts, a newer type of voucher designed to give families more education choices.

“ClassWallet’s track record is good, and we feel good about their ability to implement on a wide scale … and insulate against fraud,” said Amity Schuyler, the deputy education commissioner tasked with rolling out education savings accounts.

The company uses a platform described as a “virtual wallet,” which moves approved funds directly from parents’ accounts with ClassWallet to the accounts of private schools, tutors, or other education providers. Unlike the system currently used for Tennessee’s smaller voucher program for students with disabilities, parents will not have debit-style cards loaded with taxpayer money and also will not have to submit receipts.

The potential for financial abuse was raised by opponents of Tennessee’s voucher bill, which passed narrowly in the House this spring after years of defeats there. Many cited a 2018 audit in Arizona showing that parents there misspent $700,000 from their education savings accounts on banned items including cosmetics and clothing.

“It would be a very rare circumstance that we reimburse a parent for anything because every vendor has the ability to register for a direct payment,” Schuyler said.

ClassWallet was founded in 2014 as Kleo Inc. in Hollywood, Florida, and its financial technology platforms are used in more than 2,000 schools in 15 states. The firm began managing education savings accounts in recent years, as that voucher-style approach gained traction in some states.

“While our customers have primarily been school districts, states face the same challenges for their education savings accounts,” founder and CEO Jamie Rosenberg told Chalkbeat.

“ClassWallet is advanced technology that affords more control and accountability,” he said, “whether it’s for a teacher who makes purchases for their classroom or a state that pays for private education needs. Everything is vetted so that the use of the funds are within a configured system and it’s hard to misspend.”

The company also will be responsible for managing a separate online system for families applying to participate in the program and has subcontracted that task to FACTS Management, a vendor based in Lincoln, Nebraska.

The application system is critical, said Schuyler when asked what component worries her the most about launching education savings accounts in Tennessee.

“When I talked with people in other states, their reflections are that their application was their Achilles’ heel. They didn’t think it through. They rushed it. They didn’t pressure-test it enough,” she said.

Schuyler expects the application platform to go live in early 2020.

Amity Schuyler

“It needs to be a good user experience for families, and it needs to be a good user experience on the back end for department staff, which is minimal,” she said. “We don’t have capacity to approve applications by Excel spreadsheet. The current capacity is designed for a well-oiled system that’s intuitive and user friendly and that works.”

The process will not include a paper alternative, a decision for which the department has been criticized by some lawmakers and education advocates.

“If ESAs are really intended to target low-income families, it seems like it would be logical to make paper applications available,” Rep. Gloria Johnson, a Knoxville Democrat, said during a recent public hearing about proposed voucher rules.

“[Paper materials are] accessible to everyone and don’t require transportation to application stations or internet access and could simply be mailed out,” Johnson said.

But Schuyler said that concern, while understandable, is shortsighted.

“I haven’t spoken with a private school yet that has a paper application,” she said, “so even if we created a paper application, we would be creating a false sense of security because the parent would still have to navigate the school’s online application.”

The state has contracted with one other vendor, Nashville-based Circa, to develop the program’s website and to design printed and online materials to inform parents and providers about the program. That $50,000 contract, which began in September and runs through next June, includes designing resources such as handbooks, lists of frequently asked questions, application instructions, enrollment forms, and participation checklists.

The new law, championed by Gov. Bill Lee, allows the department to charge families a state administrative fee of up to 6% — and another 2% to a payment management vendor — for each education savings account. The department is considering underwriting part of ClassWallet’s 2%.

“We may end up splitting that so that the state assumes 1%, and 1% is passed on to the participating school,” she said.

If that happens, the average amount in each account would drop from $7,115 to just over $7,000 annually. “At the end of the day, we want as much money as possible to go directly to the student,” Schuyler said.

To be eligible, students must be zoned for Shelby County Schools or Metropolitan Nashville Public Schools and must be attending a Tennessee school this school year or entering kindergarten next year. The family’s household income also must not exceed double what’s needed to qualify for free lunch under federal guidelines. That’s about $65,000 annually for a family of four.

Below is a ClassWallet video about how it manages education savings accounts.