'Child Care Cliff' Could Strain Family Finances
Fall 2023, it seems, is peppered with financial landmines.
Just a week ago, we mentioned that student-loan borrowers would be restarting repayments come Oct. 1. But the end of September will also mark the end of billions of dollars in child care funding, threatening to put yet another strain on already stretched family household finances.
The Tea
Whether you need child care, or you're planning on having a family and you've done the homework, you know that child care is expensive.
How expensive?
In a dourly named 2023 report—"New Childcare Data Shows Prices Are Untenable for Families"—the U.S. Department of Labor, with 2018 data adjusted for inflation to 2022 dollars, determined that child care prices range from $5,357 for school-age home-based care in small counties to $17,171 for infant center-based care in very large counties. This represents between 8% and 19.3% of median family income per child.
New research from BabyCenter's State of Childcare in the U.S. Study more or less confirms parents' pain. According to its survey, American families are spending $16,686 per year (or $320 per week) on full-time child care.
That child care is increasingly difficult to find, too. The same BabyCenter study finds that families, on average, are waiting six months for a spot to open up in daycare centers.
And an expiring federal program could make both matters worse.
In 2021, Washington green-lit the American Rescue Plan (ARP)—a $1.9 trillion economic stimulus bill that included $39 billion in child care funding. ARP Child Care Stabilization Grants helped child care providers fund personnel costs, rent, personal protective equipment, and other necessary goods and services. The program has served more than 220,000 child care providers and helped to both rein in costs and keep facilities open.
On Sept. 30, however, this federal child care funding will expire—an event that could weigh heavily on the shoulders of American families.
The Take
Americans facing high child care costs no doubt have myriad questions. Are child care costs going to get even higher? Why are they so high to begin with? Is any help on the way? And what can be done about it?
To answer these and other questions, we sat down with Dominique De Lope, BabyCenter's Senior Manager of Trade Insights, for some answers and other insights from her company's recent study.
What will happen when the ARP child care funds expire?
The expiration of the ARP Child Care Stabilization funds is being referred to as a "child care cliff." And hitting it could trigger a significant downturn in the quality of care—and more hikes to child care costs.
"An estimated 70,000 American child care programs may close, and as a result, it would leave almost 3 million children without care, according to a report from the Century Foundation," De Lope says. "In addition to that impact of 3 million children, without federal funding, the centers that are remaining may have to raise their rates to keep the doors open."
That has the potential to force any number of difficult decisions for parents.
"It certainly will impact families' budgets, and ultimately, it could impact discretionary spending," De Lope says. BabyCenter's study found that 14% of families say child care already accounts for more of their budget than rent or mortgage payments, "and that number may increase."
Women historically have been more impacted professionally, too, De Lope says, and that could continue to be the case once we hit the child care cliff. "[Women] may opt to reduce hours to stay at home with their children, or have to find more flexible working arrangements," she says.
"The financial burden of child care continues to fall on women—especially single mothers who are often the ones filling those positions for low wages and limited flexibility," adds Chastity Lord, President and CEO of Jeremiah Program, a national nonprofit aiding single mothers and their children. "The implications of losing this funding is significant, and the economic fallout will be swift and severe."
The ripple effect could even hamper future family growth.
"We are already seeing in our survey that parents are really considering the size of their family and the cost of child care when deciding how many children that they want to have," De Lope says. "Certainly if child care becomes more difficult to attain or becomes more expensive, that may impact the size of the family."
Why are child care costs so high already?
Families' child care costs are going to vary widely because of several factors, including the level of care they might need and where they live.
But De Lope says that nationally, a few factors stand out:
"In many markets, child care workers are underpaid," De Lope says. "It's resulting in a shortage of staff, and that shortage is leading to a domino effect. When there's a shortage of staff, they can only care for so many children, and that is impacting the amount of care that's available in any given community."
Also, many child care providers have seen their costs increase over the past couple of years, but haven't seen a commensurate rise in revenues. In many cases, they're having to raise their rates just to maintain the quality of care for their children.
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And there's simply no let-up in demand.
"Looking at 2022 figures from the Bureau of Labor Statistics, the data showed that about two-thirds of American families with children under the age of 18 have two parents that are working," De Lope says. "Those families really don't have an alternative other than having someone else care for their children."
How are child care costs affecting family finances?
As child care costs continue to climb, families are feeling the pinch—often strongly enough to make considerable dents in their long-term financial planning.
Among some of the findings in BabyCenter's survey:
- 84% of parents say that child care costs have impacted their financial goals.
- More than half (54%) say that they weren't able to save as much as they would have liked.
- 27% of families that say that they've had to dip into savings.
- 25% say they aren't able to pay off debt.
- 23% say they've had to use credit cards more to help pay for their expenses.
- 13% left their job or career.
- 5% took out a financial loan to handle child care costs.
In some cases, De Lope says, people are having to prepay for child care a year in advance just to get their child into the program once the child comes of age.
"A mom told us she was paying for about a year's worth of child care so she could get her child into the 2-year-old-and-up group, just so that when the child actually became 2, they had a spot," De Lope says. "So she was prepaying as if the child was already in that group to reserve the spot. It's ludicrous."
(Note from your friendly YATI tax editor: If you do have to prepay for child care long in advance, you can only claim those expenses in the year care is received.)
"The wait lists are crazy," De Lope adds. "People are starting even in pregnancy before their baby is here, getting their child onto a waitlist and trying to secure that spot."
Is federal or state help on the way?
While nothing is imminent, some politicians on both the federal and state levels are trying to help fill the void left behind by the ARP Child Care Stabilization Funds' expiration.
"There is a coalition of representatives, including Sens. Bernie Sanders and Patty Murray, who have introduced the Child Care Stabilization Act, which would extend some of the stabilization funding for the industry," De Lope says. "There's also bipartisan support around a bill that was proposed in July called the Child Care Investment Act."
A few states are trying to bolster child care, too. For instance, earlier this year, Minnesota passed the Great Start Compensation Support Payment Program, which will provide child care workers with the same compensation and benefits they received via the federal program.
What can parents do about rising child care costs?
De Lope says many respondents in BabyCenter's survey signaled they were already struggling long before the child care funds were set to expire.
YATI Tip: Looking for ways to save money? Here are a few ideas on how to lower your 2023 tax bill.
"We're seeing a lot of parents who are really just trying to kind of patch together care to limit the financial burden that the actual paid child care is having on their finances," she says.
BabyCenter provides a few suggestions on how to save money on child care:
- Nanny shares: In some cases, families that only need child care part of the time can come to an arrangement for sharing the same nanny, which can help lower per-family rates.
- Child and dependent care tax credit: From YATI Senior Tax Editor Rocky Mengle: "Eligible parents can claim the child and dependent care tax credit for work-related child care expenses (i.e., you need the child care to work or look for work). The credit is worth up to $1,050 if you have one qualifying child, or $2,100 if you have two or more qualifying children."
- Dependent care flexible spending account (FSA): Whereas a regular FSA allows you to use pre-tax dollars to pay for medical and dental expenses, a dependent care FSA lets you use those pre-tax dollars to fund daycare, preschool, summer day camp, and other costs for dependents age 12 and younger. (Note: Dependent care FSA money can also be used on adult-dependent care.)
- Co-op child care arrangements: If you are part of a group of families who trust one another, a co-op child care arrangement—in which families effectively rotate child care responsibilities—could make sense.
- Employee assistance programs (EAPs): Some employers provide various forms of child care assistance, including subsidies or discounts at local care providers.
As always, thank you for reading, and we'll see you next week!
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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