Dealing with the Rising Cost of Childcare

How parents are making budgetary trade-offs to offset the cost of childcare.

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The cost of childcare for two children now exceeds annual average rent payments in many parts of the country, according to a report released last month by Child Care Aware of America, which works with state and local childcare resource and referral agencies. And in 35 states, the average annual cost for center-based care for an infant exceeds a year's in-state tuition and related fees at a four-year public college.

Of course, as the report points out, childcare costs vary widely, depending on age and geography. A year of full-time childcare in a center for a 4-year-old costs an average of $3,900 in Mississippi, compared to $11,700 in Massachusetts, while care for an infant costs $4,600 in Mississippi, compared to nearly $15,000 in Massachusetts. (Caring for an infant costs more than older children because infants require more supervision and a smaller staff-to-child ratio.)

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These findings came as no surprise to Jennifer Williams, a mother of two in Texas, where childcare for a 4-year-old in a center costs an average of $6,414 per year. "It's been going up in small increments, probably every year that they've been in daycare," she says. "It's half of our mortgage, so we have to plan for it." Although childcare costs less in her area than other parts of the country, Williams says the family takes fewer vacations and forgoes other extras to offset the cost of childcare.

With childcare costs rising, these budgetary trade-offs are happening in households throughout the country. "There has to be a paradigm shift in how families budget, and I think we've started to see that," says David Abuaf, chief investment officer at Hefty Wealth Partners in Auburn, Ind., adding that rising college costs contribute to rising service costs, including childcare. "The cost of educated people has outpaced the demand for regular goods."

Ollie M. Smith, interim executive director of Child Care Aware of America, worries that these costs can lead to tough financial decisions for parents. "One of the places they cut corners is trying to find cheaper childcare," she explains. "They put their children in unlicensed care, which we are not an advocate of. Most unlicensed childcare folks don't have any training, and they don't get inspected by the state." Childcare co-ops, where families share nannies or trade childcare responsibilities, may help save money, but Smith cautions that there could be safety issues since they aren't regulated.

[See How to Save Money on Toys for Your Kids.]

Here's a look at other ways that parents are coping with the rising costs of childcare:

Paying with a dependent care flexible spending account. A flexible spending account (FSA) through your employer allows you to pay for medical or childcare expenses using pre-tax dollars, saving money by reducing your tax liability. The Williams family uses an FSA for dependent care, but the IRS caps dependent-care FSAs at $5,000 per year, so it doesn't cover all their childcare expenses. While medical FSAs are "pre-funded," meaning the full amount of the employee's annual contribution is available on day one, dependent care FSAs are funded over the course of the year.

Shifting parents' work schedules. Nowadays, many families rely on two incomes, so having one parent stay home full-time to care for children may not be an option. Smith says some families avoid high childcare costs by having one parent work days and the other work nights, so one parent is always available for childcare duty. However, in addition to the strain of working opposite schedules and always being "on," this arrangement could short-change a child's development. "There are developmental benefits if the child is in quality childcare," says Smith.

[See 5 Ways to Juggle Work and Parenthood.]

Williams opted to put her kids in childcare rather stay home and says her older child's kindergarten teacher notices the difference between students who've gone to preschool and those who haven't. "[Kids who went to preschool] know how to be around other kids," she says. "They are more social. They know the rules. It definitely helps to get them ready in more ways than just learning how to spell their name."