I realize this week the topic is funding luxuries - a new car, a summer cottage. Sadly, a post-secondary education is no longer a luxury. Even jobs in the trades — which are very lucrative and a great career choice for young people — require training.
Learning past high school costs money. In some cases, if your kids are off to university, a whole lot of money. Tuition hovers just above $5,000 a year right now. If your kid has big dreams, med school tuition runs double that. Business smart grads might want to do an MBA. That’s going to cost $21,000 a year for two years.
I should mention those are figures from right now. In five, ten or fifteen years when your child heads off to school, those rates will be higher.
The best way to prepare for this probably inevitable part of your children’s young adult lives is to save. (Almost half of working Canadian adults right now have a college or university education behind them — so chances really are high your kid will get some sort of education.)
The RESP Advantage
The very best way to save is through a registered education savings plan (RESP). The name looks a whole lot like registered retirement savings plans (RRSPs) and in fact, the two have many similarities.
While you often buy an RESP through a bank or a financial consultant, it’s formally registered to the federal government. That’s why you need a social insurance number (SIN) to obtain one. You’ll get a pile of forms to fill out when you apply for an RESP, and many of those are filed by your bank or consultant to the government on your behalf.
Of course, you could just plunk the money you want to save for education into a savings account and not have to do any of this paperwork. But there are huge benefits of the registered program.
While there are no tax savings for you, unlike RRSPs, the government has a series of grants that it donates to your child’s fund, topping them up year after year. This is free money!
The Canada Education Savings Grant gives you 20% of what you put into an RESP every year, up to $500, per child. So if you put $400 into your child’s fund, this grant will top you up $80. If you have a low family income, you may get $50 to $100 in additional grants from this program. The Canada Learning Bond gives you $500 as soon as you open an RESP, and $100 every year — no matter how much you put in — until a child is 15. You need to be getting the National Child Benefit Supplement (the replacement for the old Baby Bonus) to be eligible.
Some provinces have grant programs as well: Alberta and Quebec currently help families save.
Cashing In
When your child starts college, university, trade school or correspondence course, you can start drawing down the RESP to fund school. Using educational assistance payments (EAPs), you or your child can draw down set amount as he or she moves through school. Basically, this prevents a child from taking the whole shot out at once and limits withdrawals to about $5,000 a term, depending on the program and other factors.
If your child does not go to school, you can keep an RESP open for a maximum of 36 years. That allows your child to go to school as a mature student. If, however, the child never plans on going to school, you can roll the savings in one child’s program into a sibling’s. And if that does not happen, you can transfer the savings into your own RRSP.
The caveat here: if no one goes to school using the money, the government grants must be returned.
Taking Care
RESPs are registered with the government, but they are still an investment you need to keep your eye on. Make sure your banker or advisor has your investment in the right kind of account: many organizations have special funds for education savings that are aggressive early on and become more conservative as a child nears post-secondary school age.
Be cautious around group scholarship programs. These act like a group investment, pooling funds from a large group and increasing investment power and payouts. There are many fees up front and there have been scams reported with this type of investment set-up.
Why do it?
Education can help your child set up a successful, independent life. It doesn’t always work that way, but when you help your kid save for school, you’ve at least done your part. You may not be able to save the whole shot (and why would you want to? Getting a job helps kids learn to manage their money and be responsible). But those savings could mean the difference between your child reaching for their dreams or spending their 20s worried about money. And saving for your kid’s education sends a powerful message about the importance of good financial planning: one your kids can relish in as they study.
