Is Daycare the Next Student Loan Crisis?

Before my oldest entered kindergarten this fall, we had 3 children going to daycare for a year-and-a-half or so. Our twins still have a few years to go.

The monthly bill was higher than our mortgage payment (including property taxes).

Luckily, my wife and I love our daycare. Our kids love going and playing with their friends. My 5-year-old daughter is best friends with boy and girl twins that she “met” at 3 months of age in daycare. She’s known them ever since.

This is a choice we made so my wife and I could both continue to work but it certainly wasn’t an easy decision at the time, from both a financial and emotional perspective.

Financially, this decision has been made even more difficult by the fact that (a) there are far more women in the workforce now than there were in the past, and (b) daycare costs have risen substantially over the past 50 years or so.

Derek Thompson broke things down in a piece for The Atlantic this week in terms of the hyperinflation in daycare costs:

In the United States, per-child spending doubled from the 1970s to the 2000s, according to a 2013 paper by Sabino Kornich of the University of Sydney and Frank Furstenberg of the University of Pennsylvania. Parents spent more on education, toys, and games. But nothing grew faster than per-child spending on child care, which increased by a factor of 21—or approximately 2,000 percent—in those 40 years.

Thompson says the average costs are now $16,000 a year. This means parents who send their children to daycare could be looking at the equivalent of paying for college from ages 0-4 and then actually paying for college again from ages 18-22. The only difference is in the second scenario you have some time to save and plan financially.

No one starts saving for childcare at age 12 to be ready by age 30 for kids.

I understand why costs are rising. Childcare has to be far more regulated now than it was in the 1970s (and for good reason). You need more teachers per child so the staffing costs are higher. Our daycare starts out at a ratio of 3:1 for infants and goes up to 8:1 by preschool. That means multiple teachers for each room.

These jobs don’t have nearly the same level of pay or benefits as teachers receive so there is always quite a bit of turnover involved with the staff. We have been lucky in that the teachers have been great and our kids love them.

After going through this for a number of kids and a number of years I have many thoughts on the current system:

  • Why is the tax break you get for daycare so low (you get up to 35% of $3,000 in expenses which doesn’t come close to actual outlays for most families)?
  • We have a public school system for our children when they reach age 5. Why don’t we have a public daycare system for pre-5?
  • Why can’t the states figure out a way to make daycare teachers more like K-12 teachers in terms of benefits and pay?
  • Why haven’t any states done this as a way to attract more young professionals to their job and housing markets?
  • How are young people who were saddled with student loan debt going to be able to afford childcare costs?

Michael and I talked about maternity leave and daycare on the podcast this week and wondered if this is potentially the next financial crisis for young people who have gone from a tough job market following the recession to huge student loans to expensive housing prices to now thinking about having kids and settling down:

There’s been this idea that millennials are unlike every generation that came before them in that their preferences are different in terms of marriage, living in big cities instead of the suburbs, never buying a car, and never settling down. I’ve long been in the camp that this is the wrong take. It’s just that they’ve put these things off for much longer than previous generations.

I don’t know how young people can prepare for this financially. Many people will tell you to simply have one of the parents stop working but it’s not always that easy.

Here’s my only advice for new parents going through this difficult decision:

Don’t let anyone else (family, other parents, friends, etc.) judge you on whatever route you take. There are no easy choices and you have to do what’s best for you and your family. For some that may mean hiring a nanny or sending your kids to daycare so both parents can work. For others that may mean forgoing income and career potential for one parent to stay home with the kids.

I’ve learned to stop judging parents on these types of decisions because no one has all the answers.

Young people have gotten the short end of the stick in many ways in terms of their finances. Childcare is one most people have yet to mention. I feel this could be a huge issue in the years ahead as more people settle down and have kids.

Further Reading:

When Your Financial Plan Gets Thrown Out the Window

Now here’s what I’ve been reading this week:

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