Some of the challenges of financing pediatric medical education are shared with all medical education; others are specific to pediatrics. The general disadvantage that funding of graduate medical education (GME) is linked to reimbursement for clinical care has uniquely negative consequences for freestanding children's hospitals because they therefore receive little Medicare GME support. This represents both a competitive disadvantage for such hospitals and an aggregate federal underinvestment in children's health care that now amounts to billions of dollars. The need to subsidize medical student and subspecialty education with clinical practice revenue jeopardizes both activities in pediatric departments already burdened by inadequate reimbursement for children's health care and the extra costs of ambulatory care. The challenges of funding are complicated by rising costs as curriculum expands and clinical education moves to ambulatory settings. Controversies over prioritization of resources are inevitable. Solutions require specification of costs of education and a durable mechanism for building consensus within the pediatric community. Pediatrics 2000;106(suppl):1256-1269; medical student education, continuing medical education, medical subspecialties, children, pediatrics, health maintenance organizations, managed care, hospital finances, children's hospitals.