Erin Lovell was a financially struggling university student when she became a first-time mother nine years ago, but that didn’t stop her from immediately setting up an education nest egg for her daughter – a smart move for any Canadian parent given the high cost of post-secondary schooling.
Now 31, Ms. Lovell, an early childhood educator working with an Ottawa school board and living in Gatineau, Que., has since had another daughter and become a single parent. But she remains dedicated to contributing to both children’s Registered Education Savings Plans - the only government-registered investing vehicle specifically for college, university or other learning after high school.
“I have set it up financially so that if my daughters were to live at home, they could afford to do their doctorates even. I have been putting a lot of money away,” says Ms. Lovell.
“The main thing is because I was in university and paying for it myself, and my parents hadn’t saved up a penny, it made me realize I can’t let my daughters go through what I went through; no matter what they get their degrees in, they need to go [to post-secondary school]. Whether you use that degree or not, it’s good to experience – and I wouldn’t want a financial reason for them not to go.”
Ms. Lovell has a group RESP, purchased through a scholarship fund company, with fixed monthly contributions of $200 for her eldest daughter and about $19,000 already accumulated. For her four-year-old, she chose a family RESP through the Bank of Montreal that gives her more contribution flexibility. She puts money into a high interest savings account and then moves what she can afford over to the education plan at year’s end.
For Ms. Lovell and other parents, rising tuition fees and student debt loads have made education savings planning a no-brainer.
According to Statistics Canada, the average tuition per school year for a university undergraduate humanities program for Canadian residents, for instance, went from $4,342 in 2007-08 to 4,791 in 2011-12, and that doesn’t even take into account the cost of campus fees, books and other incidentals. The highest tuition costs are for dentistry, with average school-year fees rising from $12,516 to $16,024 over that six-year period.
As well, a Bank of Montreal poll of 1,018 post-secondary students that was released Aug. 17 indicates 58 per cent of those who borrowed to pay for their education expected to graduate with nearly $20,000 in debt, with another 21 per cent figuring to owe more than $40,000.
"Parents are definitely concerned that they're never going to be able to save enough for their kids' education after high school, but as with any savings plan, the sooner you start saving for education the better,” says Vernon, B.C., resident Caroline Radics, a financial adviser with Sterling Mutuals Inc.
Jason Round, head of financial planning support for RBC Financial Planning in Toronto, urges parents to do their homework to help them determine what type of RESP to set up (there are group, individual and family plans), how much they can comfortably contribute to them, and whether other education savings vehicles are right for them.
“Look at your personal budget and say, ‘What kind of savings can I put into this based on what I'm doing now,’” Mr. Round recommends. ‘What sometimes get missed is that kids get gifts for birthdays or other events, and if they’re financial gifts, they can be used to accumulate funds for an education plan.”
Other ways to save for education include through a Tax-Free Savings Account (TFSA) – something Mr. Round sees as a complementary approach to RESPs - or an in-trust account set up on behalf of the child.
But while TFSAs and in-trust accounts offer more flexibility than RESPs in that they can be used for other purposes if a child doesn’t go on to college or university, neither comes with any government incentives.
Parents, relatives or friends can open RESPs through financial institutions, group plan dealers (often referred to as scholarship dealers) or certified financial planners – you first need a social insurance number (SIN) for both yourself and your “nominated” beneficiary (the child).
RESPs are tax-deferred – meaning the funds grow tax-free until the child uses the money for school. As well, the child must claim the money withdrawn on his or her taxes, but if he or she has little or no income, it must result in no taxes being paid at all.
The maximum lifetime contribution to an RESP is $50,000 per beneficiary, but that can be significantly augmented with government contributions. The federal Canada Education Savings Grant matches 20 per cent on the first $2,500 contributed annually into an RESP to a maximum of $500 a year, some children from lower-income families are eligible for a $500 Canada Learning Bond and an additional $100 a year, and Alberta and Quebec also offer incentives.
If a child chooses not to go to post-secondary school - RESPs can stay intact for up to 35 years, although they’re usually targeted for use after a child finishes high school - the money put into the plan goes back to the adult and any government grants are returned. However, depending on the plan, you may also have to pay administrative fees and penalties. Any RESP interest earned that is returned to you also will be taxed, although that can be avoided if you transfer the funds to an RRSP if possible.
Ms. Radics says the cost of funding post-secondary school is something every family should discuss with their adviser when putting together a financial strategy. With four children between ages 4 and 25 and a second grandchild on the way, Ms. Radics has made RESPs a staple in her own family’s financial plan.
“I have to get to know the client, what’s important to them – some could be fretting about retirement, paying for insurance or even just meeting daily needs,” says Ms. Radics. “The big thing I want them to do is get all that government money [contributed toward RESPs] – if you can max it, that’s amazing.”
Ms. Radics gives this example of how contributing early and often can reap big benefits: A parent puts $50 a month into an individual or family RESP made up of mutual funds with a four per cent rate of return. Over 18 years, if the parental contribution is $10,800, that plan would be worth $15,718. Add in the government incentive (20 per cent matching up to $500 annual), and the plan value goes to $19,875.
When Ms. Lovell took out her first daughter’s RESP, she put her monthly federal Child Tax Benefits into the plan, which was projected to grow to $91,000 by the time her daughter turned 18, but with the economic downturn, that projection has dropped to about $65,000.
For that reason, one of the biggest decisions associated with having an RESP is where the money is invested. While group plan investments are decided by the plan manager, family and individual plans are often self-directed, meaning you have a choice in where your contributions are invested.
Investing strategies for both RESPs and retirement-targeting RRSPs are similar in that both allow for risk-taking earlier in the contribution process if they’re purchased well before they’re to be used. However, RESPs have a much shorter time horizon for investing, meaning less time to make up for any market volatility.
If you set up an RESP right after a child’s birth, you can afford to start out investing more aggressively – for instance, putting the bulk of the contributions into equities (stocks). As it gets closer to the child’s time to attend school, you can gradually move more of your money into mutual funds, bonds, and other lower-risk fixed-income assets.
Some financial institutions offer so-called target education funds. At RBC, for instance, they are made up of a portfolio of funds with an asset mix that evolves over time.
“You pick the target date you expect your child to go to university, and at the beginning you would invest more in equities to generate growth. But over time, the asset allocation is adjusted to make it more conservative and less risky,” says Mr. Round.
A brief summary of each type of RESP plan:
Individual: There is one beneficiary, and that child doesn’t have to be related to the person who takes out the RESP. The beneficiary can be older than age 21 when named. An individual plan allows you to invest the money on your own or with the help of a financial adviser.
Family: Allows one or more beneficiaries to be named, but they must be related to the subscriber. If one beneficiary decides not to pursue postsecondary school, other beneficiaries can still be allotted the money for their education. No regular monthly payments are required, and you can invest the money yourself or through a financial adviser.
Pooled (also called group) plans or scholarship trusts: The RESP manager pools the contributions and places them in investments earning a fixed rate of return. All earnings are shared equally among all beneficiaries in the plan, and when a child attends postsecondary school, the plan funds are paid out in the form of scholarships to pay for tuition or other education needs.
Questions to ask:
The Ontario Securities Commission recommends asking RESP providers these questions before signing anything:
· What are the fees involved and when must they be paid?
· Do you have a choice about when and how much you can contribute to the plan?
· What kinds of postsecondary programs qualify?
· When and how will you receive payments from the plan?
· What happens if the student doesn’t go to postsecondary school? Can you change your mind about having an RESP?