A federal district court and Court of Appeals ruled against New York City, stating that the city could not have public school teachers provide supplemental instruction to disadvantaged students at religious schools during regular school hours. The city then sought Supreme Court review.

In a 5-4 decision, the Supreme Court ruled that a federally-funded program can give supplemental remedial education to disadvantaged children in sectarian schools without violating the Establishment Clause.

Justice Sandra Day O'Connor wrote for the majority. Justice O'Connor concluded that the program “does not run afoul of any of three primary criteria we currently use to evaluate whether government aid has the effect of advancing religion: it does not result in governmental indoctrination; define its recipients by reference to religion; or create an excessive entanglement. We therefore hold that a federally funded program providing supplemental, remedial instruction to disadvantaged children on a neutral basis is not invalid under the Establishment Clause when such instruction is given on the premises of sectarian schools by government employees pursuant to a program containing safeguards such as those present here.”

Justice David Souter argued in dissent that the Court was improperly departing from precedents established in other cases. Previous decisions found that similar programs violated the Establishment Clause for three reasons: a program might use State-paid teachers and public funds for religious education purposes; it might give the impression of State-supported religion; and it might subsidize religious education by freeing up money that would have been spent on secular classes.

Although the Court has traditionally interpreted the First Amendment to require a distinct separation between government and religion, the Court has also been sympathetic to government attempts to provide academic assistance to all students regardless of where they attend school. This tension has resulted in some significant developments—some might say inconsistencies—in case law.

Agostini was unusual in that the Supreme Court reviewed—and overturned—its own decision made in a 1985 case, Aguilar v. Felton. The Court agreed to rehear the case based on the petitioners' argument that the composition of the Court had changed; furthermore, the effects of the first ruling had imposed a huge financial burden on the school district. The earlier Aguilar decision had held that supplemental instruction by public school teachers during regular school hours violated the Establishment Clause. Justice Souter relied on this decision in framing his dissent for Agostini.

Federal and State governments have continued to look for ways to support non-religious education in parochial schools without violating the First Amendment. The Education Consolidation and Improvement Act of 1981 provided federal funds to local educational agencies for the purchase of computers and other educational equipment to be lent to public and private schools for “secular, neutral, and nonideological programs.” In Mitchell v. Helms, decided in 2000, the Supreme Court ruled that this type of direct but neutral aid is constitutional.