To be honest, I sympathise.
If you are going to give someone money to spend on an education, then say but it can only be spent at "school A" or "school B", then why not just give half of the damn money to each of the schools in the first place an be done with it.
Sure, everyone could decide to 'homeschool my kids a bit more' an pocket the dough, but if that's how much they care for their kids future, well, they shall reap as they sow (as the bible puts it).
So, no, it's not prohibiting him from practising his religion.
But, yes, he should be able to spend it on a faith-based education if he wants.
And, no, it's not a violation of the separation of church and state any more than if he spent a tax rebate on the same thing. The government gave the money to him, and he chose to give it to the 'Hovind School of Economics' or whatever.
As long as the funds are used for the hypothecated purpose, the only reason to give it to the parents in the first place (other than as a political stunt) is to allow them to choose. So let them.
(Just my 2p.)