7 ways to combat crazy child-care costs

By MP Dunleavey

Editor's note: Columnist MP Dunleavey and six other women have come together online to strip away the myths surrounding money, speak frankly about their finances and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" every other Monday in Dunleavey's column on MSN Money.

Anna, one of the Women in Red, just gave birth to a healthy 7-pound daughter and is struggling to figure out her child-care options.

Anna earns about $65,000 as a public policy lawyer, and she is the main breadwinner in her family. Her husband, an actor, earns considerably less.

Bottom line: "I can't afford to stay home," Anna says. And, at about $800 a month, it would be tough to pay for care at a local child-care center.

Surely, I said to myself, there must be more affordable options out there.

How the other half pays for kid care

Then again, maybe not. "The cost of day care is abominable," says Beth, mother of a toddler. Beth and her husband, who live in Oregon, pay $788 a month for full-time care for their toddler. "That's more than our $725 mortgage," she notes.

Fortunately, I happened to read about the rising cost of day care in a rival business publication, which promised to reveal ways real families were coping. Am I on drugs, or are these really dumb ideas?

• Take out a home equity loan (because junior will pay it off for you someday, right?)

• Ask for a tax-free gift from Gram and Gramps (because they're just sitting on a truckload of cash.)

• Reduce nanny costs by swapping some time on the family horse (not kidding!)

Alas, with her equestrian resources all tied up right now, Anna must look elsewhere.

The most common options

The number of married working women with kids under age 6 (like Anna and Beth) has increased more than 35% since 1980. But child-care options haven't increased with the demand, says Helen Blank of the National Women's Law Center. She's one of the country's leading authorities on child care.

Basically, working parents have four traditional choices:

• A formal child-care center (a chain or not-for-profit).

• A family day-care home (much smaller than a center).

• In-home care (by a nanny or sitter).

• FFN care, i.e. an informal network of family, friends and neighbors who look after your kid(s).

While a live-in nanny is your most pricey (and least likely) option -- at $27,664 a year, according to the International Nanny Association -- child-care costs in other categories are all over the map.

Stuck in the middle

You might think that middle-income families would find it easier to afford child care, but that's not true, according to Eric Karolak, deputy director of the National Child Care Information Center, a resource center and clearinghouse for every nugget of kid-care info in the country.

Even with a $4.8 billion federal child-care grant that gets distributed to states, families at all income levels scramble to pay for care. "There are a lot of families who aren't wealthy, but they are in need," Karolak says. "There's a great middle who are struggling to confront the cost of child care."

According to a nationwide survey of day-care costs published by the Children's Defense Fund, "child care can easily cost an average of $4,000 to $6,000 a year. In certain areas … families may be spending more than $10,000 a year."

How to combat these crazy kid costs

Fortunately, there are some alternatives for Anna and other moms in her shoes:

• Get financial aid: Web sites like those listed in the left column under "Related Sites" are designed to help parents dig up additional funds. For example: If your employer offers a Dependent Care Account, a type of Flexible Spending Account, you can salt away up to $5,000 in pre-tax dollars for day care (or elder care). Judy D'Avanzo, a mom in Baltimore, saves about $2,000 a year on her taxes by using this option. In addition, for child-care expenses you pay with after-tax dollars, you can take the Dependent Care Tax Credit on your tax return. Depending on your income, you can claim 20% to 35% of up to $3,000 in care for one kid ($6,000 for two or more). That could be as little as $600 to $1,200 off your taxes. Whee-ha! But still.

• Barter, swap and share: Volunteering at your child's care center, donating goods or making other in-kind contributions are possible ways to offset costs. Many parents also share caregivers and divvy up the wages.

• Keep it in the family: According to Nina Sazer-O'Donnell, a policy researcher at the Families and Work Institute, most children are in some version of FFN care. She cited one couple who worked with a relative to coordinate schedules and take care of their combined brood of five. That said, many relatives need compensation, even when caring for a beloved grandchild -- which isn't always cheap. Jackie Cabrera, a mom in New York City, pays her mom $1,700 a month (including health insurance), and says the peace of mind is worth every dime.

• Flex your schedules: According to a recent BusinessWeek article, moms aren't the only ones rearranging their work days for the sake of their kids. A growing number of dads are passing up promotions and working from home in order to do more child-care duty. With a little finagling, many couples can reduce day-care costs by flexing both schedules.

• Become an entrepreneur: Some people start sideline businesses, inventing gadgets for the mom market or selling things on eBay. Beth has a friend who coped with the high cost of day care by starting her own. "It worked for her, but it would make me tear my hair out in big, bloody chunks," Beth admits.

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• Hire a student: Local colleges are a good source of cheap(er) child care; some students are even willing to work more than just part-time. Or consider importing an au pair, which is fancy for "babysitter from another country" (check out these sites for more information: Au Pair in America, AuPairCare, GreatAuPair). While not your cheapest option (about $269 a week, which includes room, board and some hefty upfront fees), your yearly total is still less than half the cost of a real nanny.

• Someone stays home.

After reviewing the options, Anna and her husband are going to go with a combination of No. 4 and No. 7 -- with her husband being the primary caregiver for now.

Given that most day-care options would cost more than what her husband earns, it seems like the best option for them. To see if the stay-at-home parent choice is best for you, try using a Second Income Calculator, which can help you do the cost- benefit analysis of going from one income to two.