Nearly 400 students who had hoped to enroll in a Minnesota online school are getting rejection letters because of state budget cuts.

Minnesota Virtual Academy attracted strong interest—especially from home schoolers—with its promise of a tuition-free education and curriculum directed by former U.S. Education Secretary William Bennett.

But the state’s new education bill limits online enrollment for students not previously in public school to about 200. That shut out many who wanted to attend Minnesota Virtual Academy, a partnership between Bennett’s Virginia-based company K12 Inc. and the small southeastern Minnesota school district of Houston.

Rejection letters—395 of them—arrived earlier this summer.

“It doesn’t seem fair,” said Betsy Zastrow, a Bloomington, Minn., mother who hoped to enroll her son in the school’s kindergarten program. “This is a public school. Shouldn’t he be able to have a position there?”

State officials say it all comes down to money. A student in a public school generates $4,601 in per-pupil funding for each district. If, for example, a Mounds View student enrolls in a South Washington County online program, part of that student’s funding goes to South Washington County. That doesn’t have an impact on the state budget. But if a student not enrolled in a public school—whether a kindergartner entering the school system or a home schooler—takes the same course at South Washington County, the state has to come up with extra money.

For the next school year, lawmakers set aside $1 million for public school online opportunities to those not enrolled previously in public school. The following year, there is $1.25 million. In Minnesota, 15,000 students receive their education at home; about 90,000 attend private schools.

The state estimates that without some cap on enrollment, online education could cost up to $40 million in new state spending for those not previously enrolled in public schools.