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 parents are working or enrolled in education or training programs.1 Subsidy programs are intended to support parents’ ability to work, promote parental choice of care arrangements, support the supply and enrollment of children in high-quality care, and enhance child development.
WHAT PROGRESS HAVE STATES MADE SINCE THE 2020 ROADMAP TO INCREASE ACCESS TO CHILD CARE SUBSIDIES?
38 States Made More Families Eligible for Child Care Subsidies
Since 2020, many states have dedicated resources toward expanding eligibility for child care subsidies, often by increasing their initial income eligibility limits. As a result, the average initial income eligibility for subsidies across states, measured as a percentage of the federal poverty level (FPL), increased from 188% in 2020 to 237% in 2024.
Vermont had the highest income eligibility limit between 2020 and 2024, starting at 300% of the FPL in 2020 and increasing to 575% of the FPL in 2024. Of the 38 states that increased their initial income eligibility limits, 21 states increased by 50 percentage points or more, and nine states by 100 percentage points or more.
Federal requirements restrict states from setting income eligibility limits above 85% the state median income (SMI), unless the state fully funds the program for families above this limit. In 2020, only five states set their initial income eligibility limit at 85% of the SMI and no states set their initial income eligibility limit above this threshold. By 2024, the highest limit had risen to 162% of the SMI (New Mexico) and the number of states setting their eligibility limit at or above 85% of the SMI more than tripled (16 total states).
Though these changes will ensure that more families are eligible to receive subsidies, without sustainable funding for these changes, states may ultimately not be able to serve all eligible families.
28 States Set Affordable Copayments for Families
Since the 2020 Roadmap, states have taken steps to reduce family copayments for child care. During the pandemic, several states waived copayments for all families. Even after the expiration of federal relief funds, states continued to invest state dollars toward making child care more affordable for families by reducing family copayments.
More recently, the federal government released a new rule requiring all states to cap copayments at 7% or less of family income by 2026, for all families regardless of family size and income. Between 2023 and 2024, six states adopted this cap, bringing the total number of states in compliance with this requirement to 28.
As states move toward compliance with the new federal rule, additional funding will be necessary to prevent potential trade-offs, such as a reduction in the number of children receiving a subsidy or decreases in provider reimbursement rates.
27 States Reduced Out-of-Pocket Costs for Families
A family’s out-of-pocket costs for child care include both the copayment and any additional fees charged by providers if reimbursement rates are below private pay rates. In 2020, a family of three with an income at 150% of the FPL in Missouri paid 29% of their income in out-of-pocket child care costs, the highest rate among states. In 2024, the maximum out-of-pocket cost for the same family decreased to 20% (Hawaii).
Between 2020 and 2024, a total of 27 states reduced out-of-pocket costs for families. In contrast, 19 states increased out-of-pocket costs during this period, largely due to pandemic-era waivers coming to an end.
States should assess the impact that additional fees have on increasing the total cost of care for families and explore strategies to mitigate these costs, always ensuring the financial burden is not transferred to child care providers or families. Addressing these additional costs will help ensure that child care is accessible and affordable for more families.
Nearly All States Increased Provider Reimbursement Rates
Since the 2020 Roadmap, all states but Maine supported child care providers by increasing reimbursement rates. Average reimbursement rates for infants in center-based care increased from $958 per month in 2020 to $1,365 per month in 2024. This trend was largely driven by the influx of federal relief funds into the child care sector during the COVID-19 pandemic, illustrated by the fact that the largest increase in reimbursement rates was between 2021 and 2022, when 35 states increased rates by an average of $244 per month.
However, as the cost of child care continues to rise faster than reimbursement rates, the gap between what a family must pay and what the state contributes is widening. As of October 2024, of the 47 states that set rates based on market rate surveys (the District of Columbia, Colorado, New Mexico, and Virginia use alternative methodologies), 29 states released updated surveys, but only 13 states set their base reimbursement rates at the 75th percentile (the federal target for equal access). In the states in which reimbursement rates fail to increase at the same level as the market rate, families and providers are left to absorb those additional costs.
States Are Considering Reimbursing Providers Based on the True Cost of Quality Care
States have also begun exploring alternative methodologies to set reimbursement rates, typically through cost estimation models (CEMs). Unlike market rate surveys, which provide a picture of what providers can charge families, CEMs may provide states with a more accurate estimate of the costs of high-quality child care, including operating expenses and equitable wages for staff.
This approach may help states to establish rates that align more closely with the cost of building and sustaining high-quality programs. A CEM can also support reimbursement rates to better incentivize providers to accept subsidies, offer competitive wages, and remain financially viable—critical factors for the long-term stability of child care systems.
In 2020, only the District of Columbia used a CEM to set reimbursement rates. Now, New Mexico, Virginia, and Colorado are also taking this approach, and more states are currently in the process of developing their own models.
States Considered Additional Investments as Federal Relief Funds Expired
The infusion of federal relief funds into child care during the pandemic was unprecedented, and provided states with significant flexibility to address their unique needs. As these funds expired, many states took action to allocate state resources to their child care subsidy programs.
Three states stand out for developing dedicated funding streams for child care subsidies during this period.
- New Mexico dedicated funds from oil and gas revenue to support significant overhauls to its subsidy program and the broader child care system.
- Vermont increased the state payroll contribution by 0.44% and transformed its subsidy program into an entitlement program.
- Washington established a 7% tax from capital gains on the sale of financial assets for profits exceeding $262,000.
These states join Louisiana, which uses revenue from taxes on hemp-derived CBD products, land-based casinos, fantasy sports betting, and sports betting to fund infant and toddler subsidized care.
Other states also made strides toward increasing state general fund contributions to child care subsidy programs. In 2023, Minnesota, Illinois, Louisiana, and North Dakota significantly boosted funding for their programs. In 2024, at least 16 states increased their budget allocations, with the most notable changes seen in Maryland, Oregon, Pennsylvania, Vermont, and Virginia.
States may also continue to explore the development of dedicated funding streams to help ensure that positive policy changes, such as increasing provider reimbursement rates and reducing family copayments, are sustained. As opposed to allocations from a state general fund, which may change during any given session, dedicated funding streams have the potential to provide long-term stability and predictability. By pursuing these strategies, states can support transformative changes to their subsidy programs that address accessibility and affordability for families.
For more information on state progress to increase access to child care subsidies, check out the 2024 Prenatal-to-3 State Policy Roadmap.
Moving Forward: Continuing the Momentum for Child Care Subsidies
Since the 2020 Roadmap, states have made improvements to child care subsidy policy by increasing income eligibility limits, reducing costs for families, increasing provider reimbursement rates, developing methodologies to assess the cost of high-quality child care, and increasing state funding.
Moving forward, states will need to develop policy solutions for child care subsidies that create a strong, sustainable system of care for young children, balancing affordability and accessibility for families with a viable business model for providers. These changes will require significant and sustained state funding to address the core funding challenges the child care system currently faces.
Key policy solutions may include creating dedicated funding sources for child care subsidies, developing cost estimation models to set reimbursement rates, reducing the financial burden on families, expanding income eligibility limits, and exploring innovative solutions to support the child care workforce.
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
