One of the largest line items on millions of Americans' household budgets already gets bigger and bigger every year—but soon, that rising cost could start accelerating even more.

That line item is child care. And it's a whopper.

We wish we could say there's much any of us could individually do to stop this cost from skyrocketing, but we can't. But what we can do—with the help of today's expert guest—is help people understand why child care prices are going up, and more importantly, outline real-world steps that parents (or parents-to-be) of young children can take to blunt some of these rising costs.

The Tea

If you've ever had (or currently have) kids and needed to pay for child care, you already know the pain.

If you've never had kids, talk to one of your friends who has. It'll give them a chance to vent about one of the greatest sources of financial stress they've ever had—and, if they're through paying those costs, they'll get the rush of remembering that it's all finally over.

BabyCenter, a pregnancy information provider, recently wrote that America's average per-child cost of child care was nearly $17,000 per year. (That number grows by another $10,000 or so if families need a nanny or au pair.) In some parts of the country, it's not uncommon to hear that parents are paying more in child care costs than they're spending on their mortgage!

Costs are getting so out of hand that they're having a measurable impact on Americans' family plans. According to BabyCenter's State of Childcare in the U.S. Study, 24% of moms said they've decided to have fewer children because child care is so expensive, while another 25% said they were pausing or delaying having more children for the same reason.

Unfortunately, this problem is only set to escalate now that the U.S. has fallen off the "child care cliff."

We wrote about the child care cliff in fall 2023, but a quick refresher:

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.

That funding has since expired, and the Century Foundation, a New York City-based think tank, says the consequences could be dire. It estimates that 70,000 American child care programs could close as a result, leaving almost 3 million children without care.

And the centers that remain open could become even less affordable than they already are.

The Take

As more time passes, a growing number of parents are likely to find themselves in an unpleasant (or downright untenable) financial position. So we've decided to sit down with Grant Gallagher, AVP and Head of Financial Wellbeing at Affinity Federal Credit Union, to discuss several things parents should be considering: options to reduce child care costs, ways parents can spend smarter, and the mental-health aspects of navigating this child care crisis.

WealthUp: Let's start by helping people understand what ARP Child Care Stabilization Grants did, and what it means now that they're gone.

Gallagher: Child care is an area that has been overlooked for a long time. [Before COVID], costs had already been ballooning. 

But the stabilization funds allowed [child care centers] to continue to operate with higher costs of labor. Over the past few years, incomes rose to keep up with inflation. But because the stabilization funds were in place, that helped offset some of the child care employees' rising incomes, so tuition didn't have to rise as much. 

WealthUp Tip: One of the most important kid-related tax benefits is the child tax credit. Here's what you need to know.

It's a tough industry. There are a fair amount of certifications and requirements depending on the level of child care you're looking at. For some of those centers, if they're offering special services, that also increases their costs. There's the insurance variable, too. Across the board, expenses have gone up. And prices for child care tuition have not necessarily had to increase at such a rapid pace.

But now that the subsidy isn't available, we'll probably see significant tuition increases.

Child care was already unaffordable, so this really is a crisis we're facing. When looking at higher-cost-of-living areas, child care can easily be more expensive than the mortgage. Realistically, if you're a parent who's living paycheck to paycheck, and you're starting to see a rapid increase in costs, you're going to have to make tough decisions soon.

WealthUp: What options do parents have to reduce or offset these rising costs?

Gallagher: Most child care programs don't require full-time enrollment. Many will let you do four, three, even two days a week (This assumes you can find a center that actually has space. That's another challenge people run into: long waitlists.) But barring that, you might be able to cut back on the number of days you send your child to a care center if someone trusted will watch your kids for free or at a cheaper rate. This could mean aunts, uncles, grandparents, even a trusted neighbor who has already decided to be a stay-at-home parent and is willing to watch your kids, too. These options depend on how strong your network is.

Many states have child care financial assistance programs: Head Start, Early Head Start, state-funded pre-K. Again, they vary from state to state, but they're typically managed through child and family services or human services divisions. The challenge with those programs is they do have income thresholds. So it's kind of an oxymoron where, if you earn enough to afford day care, you might be making too much to qualify for the subsidized programs. Still, you have to turn over every stone to see what options are there to make the programs more affordable. If you're looking for subsidized programs, those are a good place to start, so go find out what you're eligible for at the state level. You can find a lot of this information at ChildCare.gov.

Another thing that's out there—it's not very common, but it does exist—are nonprofits that sometimes offer scholarships and grants, or provide subsidized and even free pre-K. Preschool Advantage in N.J., for instance, provides subsidized and free tuition to families that can't afford it. These programs also typically have income thresholds, but because they're private/nonprofit, they're typically more flexible.

Day cares offer discounts, too. A lot of day cares will have sibling discounts, teacher discounts, they'll sometimes have military discounts. Virtually every preschool or day care has a multi-child discount. And sometimes they'll provide discounts for setting up recurring payments. But you have to ask about what kinds of discounts they offer—child care centers rarely advertise or talk about them.

You can also open a dependent care flexible spending account (DCFSA), which lets you use your pretax dollars to pay for child care that you need so you [and, where applicable, your spouse] can continue to work. My day care cost is more than my mortgage, so I can use the full $5,000 that my wife and I qualify for as pretax money to pay for day care. That nets us more than $1,000 in tax savings. If you're a single filer, you can contribute up to $2,500. If you're a joint or head of household filer, you can contribute up to $5,000. The income limitations are pretty generous, too.

There's also the child and dependent care credit. If you pay for day care so you [and if you file jointly, your spouse] can work.

WealthUp Tip: You can determine your eligibility for the child and dependent care credit at IRS.gov.

The reality is: It's not a time to be prideful. You have to be shameless and explore every option you have to save money. With the cost of day care what it is, even reducing it by one day a week can free up hundreds of dollars each month.

WealthUp: Do you have any other practical advice for parents who want to save on costs?

Gallagher: Always think about what you'll need to buy in the future, and look out for sales and discounts with that picture in mind. 

You already know your kid's going to be needing another size up in clothing eventually, you know they'll need new school supplies when they move up to the next grade, so be on the lookout for big price savings now—even if you won't need those items for a few months, even a year.

Same thing goes for things like birthday presents. You always have to buy your kids birthday presents, holiday presents. I'm always buying stuff when I see a really good sale, and just putting it away. When my daughter's birthday was a couple months away, I had already bought some over-50%-off gifts and just put them away. 

Same thing for hobbies. It's easier when your kids are younger because they don't have a lot of preference in brands/styles. If you can start to buy things when the past year's versions are being replaced for the current year's version—athletic gear, dance shoes, etc.—younger kids won't know or care that they're not the very latest, and you can save a fair amount of money.

And you have to have a budget. You have to know how much you can put away and buy on a monthly basis. You can't spend and spend and hope it will work its way out, especially if you're in a tighter financial situation. 

WealthUp: How can parents manage the financial stress related to rising child care and related costs?

Gallagher: If you have a dual-income household and one of you is earning substantially less than the other, figure out the math of what you're earning, and how much cost is going into remaining employed. 

WealthUp Tip: Believe it or not, there's a tax credit you might be able to claim for summer camp expenses.

It's not just about the savings on child care—it's what you save on your commute, snacks and lunch on the job, buying professional clothing, or anything else that's going toward your work. In a lot of cases, depending on how much your spouse is earning, what your cost of living is, and how many children you have in child care, if you're earning around $50,000 or less, you might be close to breakeven with those child care costs. Also make sure when you're doing the math, you're not just factoring in salary, but benefits—healthcare, 401(k) match, any sort of compensation that's not specifically straight cash, but that you'd still benefit from.

I actually did this with my wife. We sat down and did the cost analysis—it was more beneficial that she continued to work, but it was closer than we had expected.  

You might get a massive quality-of-life improvement by being a stay-at-home parent. Think about the time you spend at your job, including the commute. Does all this take away a significant portion of your time you could be spending with your kids? Also, mentally, it can really weigh on you when you're doing your job and you see all your earnings thrown at [paying someone else to watch your kids].

If you're sacrificing all this time and effort toward employment, but you're not actually getting any work-life balance, maybe you don't quit your job, but this might be a situation where you could switch employment and have more flexibility. You might find an employer where you can work part-time—say, three days a week—and send your kid to day care those three days. On the other two days, you get to see your children and save on day care.

People fall into the assumption they have to work a traditional 9-to-5, send kids to full-time day care, all these traditional ideas. But really, we're in an unusual situation compared to what people historically think of when they think about the American dream. You can forgive yourself for not delivering on every one of those expectations.

Lastly, remember: This isn't forever. At some point, your kids will be eligible for public schooling, and whatever you're paying now in child care will be drastically reduced because of that. Even before- and after-school care programs, if you need them, are significantly cheaper than what you're paying through private industry. So have a long-term perspective. If you can just manage through the next couple of years, once you're through, you'll have a nice rebound in your income.

Riley & Kyle

WealthUp (Young and the Invested is now WealthUp)

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