CHILD CARE SUBSIDIES

WHAT ARE CHILD CARE SUBSIDIES AND WHY ARE THEY IMPORTANT?

Child care subsidy programs provide financial assistance to help make child care more affordable for families with low incomes in which the parents are working or enrolled in education or training programs.¹ Subsidy programs also aim to promote parental choice of care arrangements, support the supply and enrollment of children in high-quality care, and subsequently improve child development.

Subsidy programs are financed through a combination of federal and state funds, but the programs are administered by states. States have considerable flexibility in setting rules on program policies and administration (e.g., eligibility requirements, family copayment levels, and provider policies), resulting in substantial state variation in subsidy policies.

Child Care Is Not Affordable for Many Families, Especially Families With Lower Incomes

Families with low incomes, who are disproportionately Black, Native American, and Hispanic, face barriers to accessing affordable, reliable, and high-quality child care, especially for the youngest children. The average annual cost of center-based care in 2022 was $13,083 for infants, compared to $10,125 for 4-year-olds.² The cost of center-based infant care ranges from 25.1% to 63.3% of median income for single parents and from 7.8% to 17.9% of median income for married couples, depending on the state. Although home-based child care is typically less expensive than center-based care, cost figures remain high relative to income for families with infants and toddlers.³

Child Care Subsidies Can Increase Access to Child Care and Help Parents Work

By providing access to child care, subsidy programs may allow more parents to work or complete education and training programs and may support healthy child development when care settings are high quality and stimulate children’s early brain development.^4,5,6

Increased Parent Employment and Access to High-Quality Child Care Should Result in Improved Long-Term Child Outcomes

Child care subsidies may impact children’s social-emotional and cognitive development through two main pathways: (1) indirectly, through higher family income from increased employment, which may reduce family stress, boost access to resources, and limit adverse childhood experiences; and (2) directly, through access to high-quality child care that may provide enriching and safe environments for children that support positive early development.^7,8,9,10

Search the Prenatal-to-3 Policy Clearinghouse for an ongoing inventory of rigorous evidence reviews, including more information on child care subsidies.

WHAT IMPACT DO CHILD CARE SUBSIDIES HAVE?

Research on child care subsidies has focused almost entirely on subsidy receipt and higher state subsidy expenditures, which are linked to improvements in access to needed services (e.g., use of single, formal care arrangements), the ability of parents to work (e.g., higher maternal employment), and to increased earnings, promoting sufficient household resources.

However, the current evidence base does not provide clear guidance to states on how to fund or implement subsidy programs to increase access to high-quality child care for families with low incomes (e.g., setting an optimal subsidy reimbursement rate level, eligibility thresholds, or family copayment and fee levels).

More Research Is Needed to Determine the Potential of Child Care Subsidies to Reduce Disparities

No strong causal studies directly assess the effectiveness of child care subsidies at reducing disparities in outcomes for parents and children by race or ethnicity. However, a legacy of discriminatory policy choices to limit aid to families of color makes equal access to child care subsidies a continuing concern.

A 2019 report provided an analysis of state policies and practices in 13 states, each with more than 80% of Hispanic children in the state living in low-income communities. The report indicated that considerable variation exists among these states in terms of their child care subsidy policies and practices.¹¹ About half of the states currently have policies and practices (e.g., documentation requirements for immigration status, requirements for minimum weekly work hours) that might impose additional burden for Hispanic families to access services.¹¹

A 2022 follow-up report revealed that many local subsidy caseworkers and administrators actually engage in more restrictive practices than exist in official state policy.¹² Recent research also reveals a significant gap between the percentage of Hispanic families in the US who are eligible for child care subsidies and the families who receive them; Hispanic children account for 35% of eligible children, but just 20% of the population served with child care subsidies.¹³

More research is needed to establish whether child care subsidies contribute to reducing disparities in outcomes for parents and children by race and ethnicity, and the specific policy levers that states should adopt to effectively provide child care subsidies to families and ensure equitable access to child care.

For more information on what we know and what we still need to learn about child care subsidies, see the evidence review on child care subsidies.

WHAT ARE THE KEY POLICY LEVERS TO IMPLEMENT CHILD CARE SUBSIDIES AND HOW DO POLICIES VARY ACROSS STATES?

In contrast to the evidence for the four state-level policies that are included in this Roadmap, the current evidence base does not identify a specific policy lever that states should adopt and fully implement to effectively provide child care subsidies to families and ensure equitable access to affordable, high-quality care.

We identified three key policy levers that states can use to more effectively implement their child care subsidy program and provide families the support they need.

The three key policy levers include:

Set income eligibility thresholds at or above 85% of the state median income (SMI),
Limit copayments to 7% or less of a family’s income, and
Set reimbursement rates at or above the 75^th percentile of the state market rate survey (MRS) or use a cost estimation model to set reimbursement rates.

Key Policy Lever: States Can Provide Child Care Subsidies to Families With Incomes at or above 85% of the State Median Income

The income eligibility threshold to receive a child care subsidy varies considerably across states. States set subsidy eligibility at a specific dollar amount of family income, relative to the family size and/or structure. Federal eligibility requirements restrict states from setting income eligibility thresholds for subsidies above 85% of the state median income (SMI) unless a state fully funds the program for families above this income threshold.

Expanding the income eligibility limit would allow more families to access care. However, without additional state or federal funding for the subsidy system, the expansion of access to families with higher levels of income may result in a trade-off requiring states to reimburse providers at a lower rate.

States make changes to initial income eligibility thresholds throughout the year. States may update thresholds annually alongside changes to SMI or federal poverty level (FPL) thresholds (published each year in October and January, respectively), whereas other states update eligibility thresholds at other times of the year. Some states also set continuing program eligibility higher than initial income eligibility, which enables families to retain child care when their wages increase slightly. Data reported below represent policies as of September 1, 2023, except where known increases were made; in these cases, more recent data were used.

All but 16 states set their income eligibility limits below 85% of the SMI. Twelve states set their income eligibility limit at 85% of the state median income, and four states set it above (California, New Mexico, New York, and Vermont). New Mexico has the highest income eligibility limit, set at 166% of the SMI. In the remaining 35 states, fewer families are eligible for subsidies than federal law permits. Ten of those states set their income eligibility limits at or below 50% of the SMI.

The income eligibility limits set by states also can be understood as a percentage of the federal poverty level (FPL). Though the use of SMI to set eligibility provides for a more targeted and nuanced approach to determining program thresholds within a state, translating these figures to the FPL allows for more direct and accurate comparison across states. Eligibility varies quite a bit based on where a family lives: Fourteen states provide child care subsidies to families with incomes at 250% of the FPL or higher, whereas five states only provide child care subsidies to families with incomes at or below 150% of the FPL.

Key Policy Lever: States Can Limit Copayments to 7% or Less of a Family’s Income

The federal government considers child care affordable for families if costs are 7% or less of a family’s income. The cost burden placed on families with child care subsidies varies considerably across states. The base reimbursement rate represents only the value of the child care subsidy for the provider, not the full value of the subsidy for parents. Families may be required to participate in cost-sharing for child care received through subsidies, typically through copayments.¹⁴ States can set copayment rates at a dollar value or as a percentage of the total cost of care based on various factors, including family size, structure, income, and number of children in care.

A total of 24 states set all family copayments at or below 7% of a family’s income. The maximum possible copayment in states – calculated as a percentage of family income for families of all incomes and sizes – ranges from 0% of a family’s income in New Jersey and New Mexico to 27% in Ohio. Additionally, 18 states factor in the number of children in care, resulting in higher copayments for families in nearly all of these states as the number of children in care increases.

Families may face additional cost burdens in some states, depending on whether the state allows providers to charge additional fees. A family’s additional fee covers the difference between the reimbursement rate providers receive and the price providers typically charge to non-subsidized families (the private pay rate). Families’ total share of the cost of care includes these fees in addition to copayment contributions.

Louisiana, Maryland, New Jersey, New Mexico, New York, South Dakota, and Vermont all have low overall cost burdens on families as a result of low copayments and/or high reimbursement rates relative to the market rate price. In 11 states, providers are not allowed to charge families additional fees to cover the full market price of care. Although this approach decreases the cost burden on families, if additional costs remain, providers must absorb those losses, which may disincentivize them from accepting subsidized slots.

See the impact of out-of-pocket child care costs on families’ resources in your state in our Policy Impact Calculator.

Key Policy Lever: States Can Set Reimbursement Rates for Providers to Levels That Create More Equitable Access or Use Cost Estimation Models to Set Rates

The federal government considers state reimbursement rates at the 75^th percentile or above (covering three-fourths of slots in the state based on a recent market rate survey) as providing low-income families with equal access to the child care market.

Prices for child care that are based on the market rate survey provide information on what providers are currently charging families for care, but the market price may not fully represent the true cost of providing high-quality care, which would include paying child care workers appropriate wages and benefits.

The continued failure to adequately compensate providers – a practice rooted in racist and sexist perceptions that devalue caregiving responsibilities – may lead to unintended consequences, such as providers’ unwillingness to accept subsidies or lower quality care for subsidized slots.^15,16

As of September 2023, 23 states’ base reimbursement rates for infants and toddlers in center-based and family child care arrangements meet or exceed the federal equal access target of the 75^thpercentile of the state’s most recent market rate survey. However, many states’ base reimbursement rates cover only a portion of the rate needed to meet the federal equal access target.

States are also continuing to explore the option of requesting federal approval to use an alternative methodology for setting reimbursement rates, typically meaning the use of a cost estimation model, rather than a market rate survey. Using cost estimation models can be a pathway toward setting reimbursement rates that are more representative of the costs that providers actually incur to provide high-quality care, rather than merely the price charged by providers, which represent what families are willing and able to pay. As of September 2023, the District of Columbia, New Mexico, and Virginia are using cost models to set their reimbursement rates.

Comparing states’ base reimbursement rates to cost estimation models also provides insight into how well the rates that are based on the market rate survey cover the true cost of providing child care. Market prices may differ from the true cost of care if the rates providers charge within a state do not reflect the full costs of providing quality care to families, which includes adequate and appropriate compensation for early childhood educators. For example, providers may set rates based on families’ ability to pay or subsidize the care of infants and toddlers through higher prices charged for the care of preschoolers (e.g., due to higher caregiver-to-child ratios).

According to recent data from Prenatal-to-Five Fiscal Strategies, no states have base reimbursement rates for infants and toddlers in either center-based or family child care that fully cover the cost of base-quality care.¹⁷

The figure below illustrates the difference between the 75^th percentile of the market rate price and estimated true cost of care across states.

For more information on the state policy levers to increase access and affordability of child care subsidies see our State Policy Lever Checklists.

HOW DOES CHILD CARE SUBSIDY POLICY VARY ACROSS STATES?

In addition to variation within the key policy levers above, states vary in the distribution of the cost of child care, the total cost of care for families, the number of families served, and the implementation of quality rating and improvement systems.

The Total Cost of Child Care is Distributed Differently Across States Because of Variation in States’ Policy Choices

In the figure below, the total cost of child care is based on the cost associated with the equal access target (or 75^th percentile), and it includes the amount the state provides as a subsidy, the family’s required copayment contribution, the difference between the total cost of care and the subsidy amount paid for by the family (i.e., a fee) if the state allows it, and any unreimbursed cost to providers if the state does not allow the provider to collect a fee.

The variation across states on each of these elements is substantial, leading to widely different resources to families depending on where they live. For example, the 75^th percentile of the market rate survey varies substantially, from a low of $659 per month for an infant in center-based care in Mississippi to a high of $2,362 in Washington. In four states (Arkansas, Louisiana, Mississippi, and West Virginia), the 75^th percentile amounts to approximately $800 per month or less for an infant in center-based care, whereas the price is more than $1,600 in 10 states.

In 15 states (e.g., Florida, Idaho, Louisiana, New Jersey, and New York), the state pays providers a large share of the market rate price of care (100% or more of the MRS) for an infant in a center-based setting and families with incomes at 150% of the FPL do not have a substantial share of the total cost (families pay less than 4% of their income). In contrast, payments to providers are low in other states leading to potentially large out-of-pocket child care expenses for families (e.g., Alaska, Georgia, Hawaii, and New Hampshire) or high unreimbursed costs for providers (e.g., Colorado, Massachusetts, and Ohio).

The Percentage of the Total Price of Care that Families Must Pay Also Varies Across States

Variation across states in copayments and additional fees, as well as the extent to which state reimbursement rates cover a large portion of the market price for child care, leads to wide variation across states in the proportion of the total price of child care for which a family is responsible. In the figure below, the total price of child care is assumed to be the value of the equal access target in a state (the 75^th percentile of the MRS). A family’s out-of-pocket child care expenses include both a required copayment and any additional fees to cover the difference between the base reimbursement rate and the price of care at the 75^th percentile; together, these equal the family’s price for care.

In several states, a family’s contribution to the total price of child care is nominal: for example, in five states, families with incomes at 150% of the FPL are not responsible for any of the total price. And in Maryland and New York, families with incomes at 150% of the FPL are responsible for less than 1% of the total price. However, families are responsible for more than one-fourth of the price of care in eight states (Alaska, Georgia, Kentucky, Maine, Mississippi, New Hampshire, Tennessee, and Texas). In Georgia, families must pay more than half of the price of child care, which makes care unaffordable for many families.

State Contributions to Child Care Funding Vary, Leading to Variation in the Number of Families Served

States vary in how they maximize funding from the federal government. States can opt to provide the full amount to maximize matching funds and may contribute additional funding beyond the matching contribution level or required maintenance of effort funds. These policy choices result in variation across states in how many children are served among families who are eligible to access child care subsidies.

State also vary in their use of federal relief funds, from increasing provider reimbursement rates to waiving copayments for families to expanding eligibility to bolstering the workforce. Most federal relief funds for child care have passed the deadline for liquidation, with only CCDBG supplementary funds remaining for use through September 2024. We are monitoring the impact that the elimination of federal stabilization dollars will have on state child care subsidy programs.

States Can Link Child Care Subsidy Receipt to Participation in the State’s Quality Rating and Improvement System (QRIS)

States can use a variety of mechanisms to try to ensure their subsidy dollars are spent on higher quality child care. States typically use quality rating and improvement systems (QRIS) as a means to assess key standards of child care environments and to communicate the quality of care in settings to a variety of audiences.

To date, 30 states require either all licensed providers or those serving children with subsidies to participate in QRIS. Between 2019 and 2023, several states (Alabama, Connecticut, Florida, Georgia, Kentucky, Michigan, Ohio, Texas, North Dakota, and Virginia) have moved toward mandatory participation for all providers or providers who serve children with subsidies. In a small number of states, providers are required to achieve a minimum rating level that is higher than base quality to participate in the subsidy program.

Tiered reimbursement rates are also used by most states to incentivize programs to provide higher-quality care. These tiered reimbursements can be complemented by financial resources to equitably assist providers to improve their quality of care. Currently, in 38 states, providers receive a higher reimbursement rate if they have a higher quality rating.

WHAT PROGRESS HAVE STATES MADE IN THE LAST YEAR TO MORE EFFECTIVELY IMPLEMENT CHILD CARE SUBSIDIES?

Although most of the funding for child care subsidies comes from federal sources, states have substantial flexibility in how they implement their programs. The policy progress described below generally represents state policies as of mid-September 2023. Over the past year, several states made changes to their child care subsidy system through legislation and/or agency action. Some states have also developed sustainable sources of funding to support child care subsidy programs and to address the loss of federal relief funding.

State Funding for Child Care Subsidies

Two states made significant strides this year to increase revenue for the subsidy program. Vermont will be using a 0.44% payroll tax to support increased income eligibility, lower family copayments, and boost provider reimbursement rates. Washington will also be using a tax from capital gains on the sale of financial assets to fund child care and other education programs. The tax was enacted in 2021 but the state’s Supreme Court ruled it as constitutional early in 2023.

Vermont and Washington join New Mexico and Louisiana in the list of states with a source of revenue, outside of general fund appropriations, to fund the state’s subsidy program. Kansas and Missouri also have dedicated funds from the Tobacco Master Settlement Agreement.

Besides developing funding sources for child care, several states enacted budgets with increased funding from the general fund for the child care subsidy program to cover the expiration of relief funds. Many of these budgetary changes are tied to increased affordability and access for families and better compensation for child care providers.

Minnesota made significant investments to decrease copayments, increase provider reimbursement rates, and expand income eligibility. The state will also combine two child care assistance programs, a move that could potentially make child care subsidies more accessible to families.

Illinois, Louisiana, New Mexico, and North Dakota also significantly increased their allocations to the child care subsidies program for fiscal year 2024. Tennessee established the Child Care Improvement Fund to create new child care slots and improve existing ones.

Enhancements to Child Care Subsidy Programs

Expanding access to child care subsidies was a focal point for states this year. Nineteen states introduced—and nine states enacted—legislation to modify child care subsidy eligibility requirements. In total, 18 states increased eligibility through legislative and administrative actions.

Idaho, Indiana, and Iowa made significant progress, increasing their income eligibility thresholds to reach families at or above 150% of the FPL. New Mexico, following trends from previous years, increased their income eligibility to 400% of the FPL and Vermont enacted legislation to expand its income eligibility to 575% of the FPL beginning in October 2024.

Several states—25 in total—worked to support providers and families by increasing reimbursement rates this year. Indiana led those efforts by nearly doubling their reimbursement rates since October 2022. Missouri, North Carolina, and North Dakota increased their reimbursement rates by more than 35%.

Due to these efforts, 26 states now either reimburse all providers at or above the 75^th percentile of the market rate survey, or use a cost estimation model to set rates, an increase of seven states since this time last year. In addition, several states are looking to move away from setting rates based on a market rate survey. California and Minnesota enacted legislation requiring the development of an alternative methodology to set reimbursement rates and two other states, Maine and New York, introduced legislation that did not pass.

A number of states considered or enacted legislation to make child care more affordable for families. California enacted legislation to eliminate family copayments for families under 75% of the SMI and limit copayments to 1% of income for families with incomes above 75% of the SMI. Vermont will be eliminating family copayments for families under 175% of the FPL in 2024. Minnesota enacted legislation to cap copayments at 7% of a family’s income, effective in 2028. In total, five states decreased families’ out-of-pocket child care costs by decreasing copays.

In addition to these successful efforts to increase affordability for families, two states introduced legislation to remove copayments for certain families and three states introduced legislation to limit copayments to no more than 7% of a family’s income.

Apart from expanding eligibility, decreasing family costs, and increasing reimbursement rates, several states also focused on modifying other aspects of subsidy policy. Eleven states introduced legislation to expand eligibility to specific populations. Of those, Connecticut enacted legislation to establish categorical eligibility for children in foster care, recently adopted children, and children experiencing houselessness. Washington enacted legislation to expand eligibility to immigrant families, child care employees, and those participating in therapeutic courts. South Carolina launched a common application to streamline the process for over 40 publicly funded early childhood programs. Mississippi changed a rule that required a custodial parent to either prove child support compliance or sue the non-custodial parent before being eligible for subsidies. The state now allows single parents to access child care subsidies without receiving child support.

Notes and Sources

Child Care and Development Fund, 45 C.F.R. § 98.20 (2019). https://www.govinfo.gov/app/details/CFR-2019-title45-vol1/CFR-2019-title45-vol1-part98/summary
Child Care Aware® of America. (2022). Catalyzing growth: Using data to change child care. https://www.childcareaware.org/catalyzing-growth-using-data-to-change-child-care-2022/#methodology See Calculating National Prices, Methodology 3: Average of Program Weighted Averages. Caution should be used comparing and interpreting price figures nationally; local context should be considered.
Child Care Aware® of America. (2022). Price of care: 2022 child care affordability analysis. https://info.childcareaware.org/hubfs/2022_CC_Afford_Analysis.pdf See Tables III – VI (pp. 6-13).
American Academy of Pediatrics Committee on Early Childhood, Adoption, and Dependent Care. (2005). Quality early education and child care from birth to kindergarten. Pediatrics, 115(1), 187–191. Gale OneFile: Health and Medicine. https://doi.org/10.1542/peds.2004-2213
Bradley, R. H., & Vandell, D. (2007). Child care and the well-being of children. Archives of Pediatrics & Adolescent Medicine, 161(7), 669-676. https://doi.org/10.1001/archpedi.161.7.669
Schmit, S. (2019). CCDBG: Helping working families afford child care. CLASP. https://www.clasp.org/publications/report/brief/ccdbg-helping-working-families-afford-child-care
Ryan, R. M., Johnson, A., Rigby, E., & Brooks-Gunn, J. (2011). The impact of child care subsidy use on child care quality. Early Childhood Research Quarterly 26(3),320-331. https://doi.org/10.1016/j.ecresq.2010.11.004. This study provides an example specific to subsidies.
National Institute of Child Health and Human Development Early Child Care Research Network. (2002). Early child care and children’s development prior to school entry: Results from the NICHD study of early child care. American Educational Research Journal, 39(1), 133–164. https://www.jstor.org/stable/3202474. This study provides an example specific to the link between quality and child outcomes.
National Institute of Child Health and Human Development Early Child Care Research Network, & Duncan, G. J. (2003). Modeling the impacts of child care quality on children’s preschool cognitive development. Child Development, 74(5), 1454–1475. https://doi.org/10.1111/1467-8624.00617. This study provides an example specific to the link between quality and child outcomes.
Vandell, D. L., & Wolfe, B. (2000). Child care quality: Does it matter and does it need to be improved? US Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation. https://aspe.hhs.gov/execsum/child-care-quality-does-it-matter-and-does-it-need-be-improved. This study provides an example specific to the link between quality and child outcomes.
Gennetian, L. A., Mendez, J., & Hill, Z. (2019). How state-level Child Care Development Fund policies may shape access and utilization among Hispanic families. National Research Center on Hispanic Children & Families. https://www.hispanicresearchcenter.org/wp-content/uploads/2019/11/Hispanic-Center-CCDF-brief-FINAL1.pdf; The 13 states are: AZ, CA, CO, FL, GA, IL, NJ, NY, NM, NC, PA, TX, WA)
Lin, Y., Crosby, D., Mendez, J., & Stephens, C. (2022). Child care subsidy staff share perspectives on administrative burden faced by Latinos applications in North Carolina. National Research Center on Hispanic Children & Families. https://www.hispanicresearchcenter.org/wp-content/uploads/2022/07/HC-NC-CCDF-brief-7.29.2022.pdf
US Government Accountability Office. (2016). Access to subsidies and strategies to manage demand vary across states [GAO-17-60]. US Government Accountability Office. https://www.gao.gov/products/GAO-17-60
National Center on Subsidy Innovation and Accountability. (2018). CCDF Family Co-payments. Office of Child Care, Administration for Children and Families, US Department of Health and Human Services. https://childcareta.acf.hhs.gov/sites/default/files/public/family_co-payment_brief_0.pdf
Lloyd, C.M., Carlson, J., Barnett, H., Shaw, S., & Logan, D. (2021). Mary Pauper: A historical exploration of early care and education compensation, policy, and solutions. Child Trends. https://earlyedcollaborative.org/assets/2022/04/Mary-Pauper-updated-4_4_2022_FINAL.pdf
Coffey, M. (2022, July 19). Still Underpaid and Unequal [Center for American Progress]. https://www.americanprogress.org/article/still-underpaid-and-unequal/
Workman, S. & Capito, J. (2023). 51-state cost model [Data set]. Prenatal to Five Fiscal Strategies. The full set of assumptions for the cost methodology can be found in the 2023 Prenatal-to-3 State Policy Roadmap methods and sources documentation for child care subsidies (https://pn3policy.org/methods-and-sources/. A full cost model calculator will be available from P5FS later in 2023.

UNITED STATES

ROADMAP POLICIES AND STRATEGIES

EFFECTIVE POLICIES

EFFECTIVE STRATEGIES