Jordan Brown, Catherine Davis | November 18, 2025

How is the Child Care System Funded?

The high cost of child care has become a common talking point in the United States. In Texas, child care tuition averages nearly $10,000 per year, a rate that rivals the cost of tuition at a 4-year public university. Primarily funded by private tuition, child care is an incredibly costly and labor intensive service. As a result, most programs to operate on thin margins and must make difficult choices in an attempt to keep tuition low for parents, such as limiting staff wages or forgoing curriculum and building improvements.

These challenges beg the question: what role does public funding play in ensuring working families can access the high-quality child care they need? The federal Child Care Development Block Grant (CCDBG) is a critical funding source that supports child care access by offsetting tuition costs for some low-income working families, as well as supporting quality initiatives for child care programs.

This brief explores how CCDBG and other revenue sources support child care, their structure and limitations, and recent efforts to bolster Texas’ approach to child care funding. It also sheds light on bright spots from other states, including recent investments and initiatives aimed at addressing the child care business model.

Federal Child Care Development Block Grant – Scholarships & Quality Funding

The federal Child Care Development Block Grant (CCDBG) is the largest and most influential source of public funding for child care. CCDBG helps offset the costs of child care for some low-income working families and supports a range of quality initiatives for child care programs.

In 2025, Texas received approximately $1.6 billion in federal funding from CCDBG. The state contributed the minimum amount of matching funds needed to draw the full allocation down—roughly $280 million. This bulk of this funding is managed by the Texas Workforce Commission (TWC) and put towards two primary expenses: child care scholarships and quality initiatives.

Child Care Scholarships help low-income parents offset the high cost of tuition at a child care program. In fiscal year 2025, TWC spent $1.2 billion to provide approximately 155,000 children per day with child care scholarships, amounting to only about 12% of the eligible population.

Scholarship funding passes from TWC to its 28 Local Workforce Development Boards, which manage the family application process and reimburse child care programs for children receiving scholarships. This reimbursement is typically supplemented by a parent co-pay (determined by a sliding fee scale and capped at 7 percent of household income).

Scholarship Rates: In Texas, scholarship amounts vary greatly from child to child and are based on four primary factors:

Market Rate – Every year, Texas conducts a Market Rate Survey which analyzes the tuition rates of child care programs in each Workforce Board region. The state sets scholarship funding for each region at the 75th percentile of the analyzed rates–put simply, the amount where 75% of providers charge a certain amount or less, and 25% charge more. While this reflects regional variation in child care costs, it does not take into account that many child care providers artificially reduce tuition to avoid driving parents out of the market. Therefore, it simply reflects what families in an area can afford to pay, not the true cost of providing quality care. As a result, scholarships often pay providers less than they actually need.
Reimbursement Rate vs Market Rate. While TWC establishes the local market rate at which child care programs can be reimbursed, if a child care program posts tuition that is lower than the market rate, the workforce board is required to lower the reimbursement rate to match it. As a result, many programs do not receive TWC’s established reimbursement rates because they have reduced tuition costs to stay affordable for families.
Age – Scholarship rates also vary based on the age of the child. While children aged 0 to 13 (or under 19, if disabled) may be eligible to receive a scholarship, ratio requirements for younger children (i.e., one teacher to four infants versus one teacher to every fifteen preschoolers), make them more expensive to serve, and therefore demand higher rates (see chart below).
Hours served – The number of hours the child attends a program also determines their scholarship amount. There are three tiers of rates: full time (6-12 hours), part time (less than 6 hours), and blended (for children enrolled in a school program, pre-k, Head Start, or Early Head Start in which child care is provided part-day). This accounts for families with varying care needs, including those who only require before and after-school care or children enrolled in Pre-K Partnerships, where pre-k funding covers a portion of the day.
Quality Rating – Child care programs are required to participate in Texas Rising Star (TRS) in order to accept scholarships. Providers are also reimbursed at higher rates based on their TRS rating, recognizing that maintaining higher levels of quality is more resource intensive.

The fiscal year 2025 market rates provide the daily rates change based on age and TRS rating for full-time children.

Quality Initiatives

Over 20% of Texas’ CCDBG allocation (approximately $27 million) supported quality improvement activities in fiscal year 2025. The majority of Child Care Quality funding is spent on the state’s quality rating and improvement system, Texas Rising Star (TRS). TRS mentors hired by the Local Workforce Development Board support programs with licensing, quality, and professional development to help achieve a positive TRS rating. TWC contracts with an outside entity to conduct formal reviews of TRS programs.

Local Workforce Development Boards also utilize their quality dollars to fund a variety of locally-identified initiatives (outlined in their annual Quality Plan). These initiatives often include infant and toddler quality supports, professional development for child care directors and teachers, health and safety resources, evaluation tools to measure effective practices or child development, and other activities such as shared service alliances or wage stipends. While workforce boards have flexibility to implement certain programs based on local needs, restrictions on quality expenditures often limit innovative efforts and are not enough to support the many fixed-expenses driving tuition costs.

Other Funding Sources for Child Care in Texas

Child care programs can supplement CCDBG funding and parent tuition payments through participation in other state-funded programs such as Public-Private Prekindergarten Partnerships or the Child and Adult Care Food Program (CACFP). In Texas, accredited programs can contract with a school district to provide prekindergarten services and draw down student-generated public school funding. Licensed child care centers and homes can also apply to the federal CACFP program, which directly reimburses programs for serving approved meals and snacks to children. While these examples and other outside sources can provide funding for specific services, not all child care programs are eligible or have the capacity to participate.

Challenges: High-Costs for Parents & Low (to no) Profit Margins for Providers

Unfortunately, public investments combined with parent tuition alone aren’t enough to balance out the high cost of running a child care business. This forces programs to make difficult choices: lowering wages for early educators, closing classrooms, or increasing costs for families in order to make ends meet. With the average costs of child care in Texas ranging from $10,000-$15,000 annually, and taking up, on average, 24% of a family’s household income, most programs cannot raise prices any further without pricing families completely out of the market. These challenges stem from the following factors:

Labor Intensity

Child care is very labor intensive, and the work of caring for children cannot be automated. Staff wages are the primary cost drivers for child care programs (roughly 40-50% of their expenses). Each classroom is held to state licensing ratio requirements, which groups children by age. The younger the children, the more supervision they need. This makes infant care notoriously expensive. With a ratio of 1 teacher to every 4 infants, parents must theoretically pay for one quarter of that teacher’s wages per day. Even if the teacher is making just $14 per hour, the parent must pay $10,080 per year for that supervision. This combined with overhead costs like rent and classroom supplies only further increases costs passed through to parents.

Per-Child Revenue Model

Because the child care business model is reliant on per-child tuition, attempts to increase quality or educator wages must happen on the backs of working parents. The only mechanism of tuition relief in Texas is the child care scholarship (CCS) program via CCDBG. Past attempts to raise wages and increase quality through increased scholarship reimbursement rates have largely proven ineffective, due to the fact that only a minority of children (and in many programs, no children) receive these subsidies. In Texas, scholarship-receiving students make up less than 20% of the state’s licensed capacity in child care, meaning added costs are typically passed on to private-pay parents. With nearly 90% of eligible, low-income families in Texas left to cover tuition costs completely on their own and no funding mechanism to support the fixed-costs of the program that must otherwise be absorbed by private-pay parents, child care programs have continued to operate on precarious margins in an effort to not price parents out of the market completely.

Opportunities: Bright Spots & Lessons from Other States

Texas and other states are beginning to recognize that child care cannot survive on the current federal funding system alone. Alternative sources of stable funding are critical to success.

Recent Texas Investments in Child Care

State investment in Child Care Scholarships: Notably, the 2025 Texas Legislature transferred $100 million in one-time funding from the federal Temporary Assistance for Needy Families (TANF) block grant to provide additional child care scholarships. This was a first of-its-kind investment for Texas and was estimated to support roughly 10,000 additional children. However, due to increased reimbursement rates driven by inflation and more programs achieving higher TRS ratings, the number of expected Child Care Scholarships provided was ultimately less than the year before (149,743 children in FY 26; a reduction of approximately 5,400 children from FY 2025). Ultimately, this funding played an important stabilizing role rather than serving more families. This one-time expense will need to be reapproved next legislative cycle, during which Texas will have the opportunity to build on this momentum and explore innovative models of funding.
Tax measures have also been leveraged to provide financial relief to child care. In 2023, Texas voters approved Proposition 2, which allowed cities and counties to exempt child care centers from local property taxes. In Tarrant County, programs have saved an average of $2,500 per year. However, this exemption only applies to programs serving a minimum of 20% students receiving scholarships. As of late 2024, only 14 counties and 11 cities in Texas had adopted this tax exemption, and only 17% of the estimated 15,000 child care centers in Texas met the requirements of the law, limiting the impact to a small subset of providers across the state.
Education Savings Accounts were recently established in Texas, allowing parents to use public dollars on private education-related expenses. This includes tuition for prekindergarten or kindergarten at a high-quality child care program. ESAs will be worth over $10,000 per year, about the cost of child care tuition in Texas. For pre-k eligible families on the Child Care Scholarship waitlist, an ESA could be a useful alternative to help pay for child care. But like child care scholarships, ESAs are limited in number, only serve a subset of young children, and therefore cannot solve the issue of general instability in the sector.

Other State Investments in Child Care

In 2025, Montana created the Growth and Opportunities Trust (GO Trust), which established the Early Childhood State Special Revenue Account. The account was seeded with $10 million in state funds which will grow over time through interest and contributions. Annual transfers from the fund can be used for a variety of activities that improve the stability and affordability of child care across the state. This includes grants to help start or expand child care businesses, early educator continuing education, recruitment and retention stipends for qualified workers, quality improvement activities, scholarship expansions, innovation initiatives, and emergency assistance or disaster relief. Several other states have developed trust funds to support early childhood and care initiatives.

In 2023, Alabama invested $30 million in the Alabama Quality Stars program (similar to the Texas Rising Star program) to provide more coaching and funding incentives to child care programs that achieve high-quality instruction. To alleviate the downward pressures on early educator wages, Kentucky made all child care employees eligible for scholarships, regardless of income. Georgia allocated extra lottery funds to pay for a $2,000 salary bump for pre-k teachers and assistant teachers across the board.

Michigan is well-known for its innovative Tri-Share Program, in which the costs of child care are divided between the state, employers, and their employees. Kentucky adopted a similar model in 2022. The idea has been popularized as more businesses express the need for a stable workforce with access to child care.

Conclusion

While federal and state investments have provided essential relief, they remain insufficient to meet the full cost of quality care or the needs of working families. Scholarship-receiving families come and go, making subsidies an unreliable source of additional income. As a result, child care has been left to braid multiple funding streams in order to stay afloat, and it doesn’t always work, as evidenced by the number of programs that have closed since 2019. While recent initiatives in Texas have provided valuable support, they remain fragmented and short-term. Continued exploration of sustainable and diversified funding strategies will be critical to strengthen the stability, affordability, and quality of child care across the state.