Parents enrolling their children in universal pre-K could see their income rise more than 20%

New parents often feel cornered between two difficult choices: pay out of pocket for pricey daycare and pre-kindergarten, or stay at home with their children and potentially lose years of earning potential. Amid today’s exuberant cost of child care, some states have implemented universal pre-K, which is free, state-funded and available to all families, regardless of income. While not all families in those states have access to universal pre-K (families in states that offer it often need to apply via a lottery system), new research suggests that those who do will make major financial gains from it.

Universal pre-K increases parents’ earnings by 21.7 percent per year, according to a new study published this month in the National Bureau of Economic Research (NBER). Those earnings continue for at least the next six years after the end of pre-K, adding up to tens of thousands of dollars in parents’ pockets.

Parents who send their children to universal pre-K are at an advantage, compared to parents who don’t have the option. Not only do they not have to pay for child care when their children are 3 and 4 years old, but they also have more choices at work, such as staying at their job or working more hours, which gives them a leg up financially over other parents. Universal pre-K is a win for families — if they live in an area that offers it.

“(Universal pre-K) is one of the most cost-effective active labor market policies ever evaluated in the US,” the study states.

Parents with children in universal pre-K earn over $5,000 more per year than other families

NBER’S study, conducted by researchers at Yale University and Brown University, examined the universal pre-K program at New Haven Public Schools in New Haven, Connecticut between 2003 and 2022. New Haven’s pre-K students, who are 3 to 4 years old, are selected in a lottery system for free, all-day school.

With access to universal pre-K, New Haven parents were able to work 13 more hours per week during those two years than parents whose children weren’t enrolled, and they earned more than $5,000 per year as a result.

Parents with children enrolled in universal pre-K are likely able to earn more than other parents because they can work longer hours or, as some parents said in the study, because they won’t have a gap in their resume from staying home with their child. In the study, parents say universal pre-K “helped them maintain their career paths, keep normal work hours, or work more effectively.”

“Oftentimes, depending on one’s career choice, paying for daycare or a nanny is more expensive than what they’re bringing home. (Or), one person has to take a step back, which is unfortunate, because sometimes it’s harder to take a step back in when the kids are in school,” says Ronya Corey, a certified financial planner at Merrill Lynch Wealth Management.

While public programs like universal pre-K are taxpayer-funded, parents’ earnings dwarf any government spending. Universal pre-K was a key platform early in President Joe Biden’s tenure, but the $110 billion proposal fizzled out when his Build Back Better plan failed to pass in Congress. While the plan failed in part due to some lawmakers’ concerns over backing the program with state funds, the NBER study states that for every dollar of net government spending on universal pre-K, families gain $5.51 in after-tax benefits, largely from parents’ additional earnings.

“(Universal pre-K) offers a high return on public investment overall, and particularly stands out relative to other active labor market policies,” the study states.

Those other labor market policies include:

• The Earned Income Tax Credit: $3.20 for every $1 spent by the government
• Trade Adjustment Assistance: $2.70 for every $1 spent by the government
• The Job Training Act: $1.40 for every $1 spent by the government
• SNAP Work Requirements: 90 cents for every $1 spent by the government

Despite benefits, access to universal pre-K is limited

As of 2024, a growing number of states (and Washington, D.C.) have either widely-used universal pre-K programs or are currently implementing new policies, according to the National Institute for Early Education Research (NIEER). Some of the states that offer it are:

• Florida
• Georgia
• Illinois
• Iowa
• Maine
• New York
• Oklahoma
• Vermont
• West Virginia
• Wisconsin

Today, access to free- or low-cost pre-K largely depends on state or municipal funding, but state advocates say without federal funding, they’re struggling to keep small child care centers afloat and to hire teachers.

Without access to state-funded pre-K, private pre-K is another option for parents. However, the high price of private pre-K will outweigh any extra funds parents bring in. While parents brought in more than $5,000 more per year while their children were enrolled in universal pre-K in New Haven schools, Connecticut’s annual private pre-K costs $1,152 per month on average, or $13,828 per year, according to the Connecticut Post.

Nationally, the figures aren’t much better: The average cost of private preschool in the U.S. is $889 per month, or $10,668 per year, according to the Connecticut Post. The study points out that, while parents would be happy to borrow against future earnings to pay for pre-K, banks don’t issue loans for child care.

“(Child care) is an extraordinary expense, so to not be able to put your children into school in kindergarten, if you can do it two years prior … that’s a considerable amount of money that you can put into cash reserves to make that family more secure,” Corey says.

4 places to put extra funds while your child is young

If you’re one of the lucky few able to send your child to free or low-cost child care, or if you just want to know all your savings options for your family, there are several ways you can use extra funds to set your child up for success. Consider these four methods when planning for your child’s future:

1. A 529 plan

A 529 plan is a tax-advantaged savings plan meant for education expenses, such as tuition and fees, room and board or books. It’s not just for universities — students can also use the funds at technical or vocational schools. The funds are tax-free so long as they’re used for education expenses.

Anyone can establish and contribute to a 529 plan, including parents, grandparents or other relatives. Just keep in mind that when you withdraw funds, you must use them in the same calendar year.

529 101

For more information on 529 plans, check out Bankrate’s guide for the full details on how to establish one and what conditions you should keep in mind.

Read more

2. A custodial account

Custodial accounts are opened by an adult for the benefit of a minor. Specifically, two kinds of custodial accounts, uniform transfer to minors accounts (UTMA) and uniform gift to minors accounts (UGMA), are great options for parents who want more flexibility in how they save for their child.

UTMA and UGMA accounts have slight differences — UTMAs allow you to invest cash or in property, while UGMAs allow you to invest cash and securities. However, both let you save money on behalf of your child. Once your child is 18, they have access to the accounts and can spend the money however they please.

3. A certificate of deposit (CD)

A CD is a deposit account that offers a fixed rate of return, so long as you keep your funds in it until the term expires. This is an especially useful option if you want to save funds for your child’s future education expenses now and won’t need to access the funds until later.

Terms can last from as little as a few months to five years, so pick the option that’s best for you, depending on when your child will need the money. If your child is young, you can open a new CD as soon as the old one expires and watch your money grow over time.

4. An emergency savings account

Whether your child accidentally breaks a window or develops an expensive hobby, it’s never a bad idea to have an emergency fund for family expenses.

“I always say it’s good to have a goal, because unless you have a goal, you’re not necessarily saving towards anything specific,” Corey says. “When you have a goal, your mind is set to that.”

Corey advises first-time parents to begin saving when they know they’re expecting. She recommends analyzing your expenses, understanding your needs and wants (and how much wiggle room you have) and beginning to save a little bit more than you did before.

Not sure where to put those funds? A high-yield savings account will offer a much higher interest rate than a traditional savings account, and will help your funds grow, thanks to compound interest. Best of all, you can access the funds anytime you need to.