Parental anxiety plays a big part in the annual back-to-school spending extravaganza.
Anxiety about whether our kids have the best we can give them as they head back to the classroom or away a post-secondary education.
Anxiety about whether our kids understand the value of all the money being thrown around at this time of year, and whether they have the makings of smart financial managers.
Anxiety, to sum up, about whether we’re doing all we can to help our kids succeed, and whether our kids are doing all they can.
When I perfect my parenting skills, I’ll be glad to offer you some pointers in that area. Financially, I do have a thought.
While you’re ticking items off the endless list of things kids need for school these days, make sure that you have a registered education savings plan (RESP) to which you’re making regular contributions.
Does this really have to be said in 2010, 12 years after RESPs were turned into must-have savings vehicles through the introduction of the Canada Education Savings Grant? That’s where the feds annually match your contributions to an RESP with up to $500 in basic grant money per eligible child, with a lifetime cap of $7,200.
The answer is a definite yes, based on a conversation I had recently with Zach Dayler, national director of the Canadian Alliance of Student Associations, for our Let’s Talk Investing series of online videos. In a segment called ABCs of student debt,Mr. Dayler tells me that about 14 per cent of post-secondary students are using RESPs to help pay their educational costs.
That’s a pitifully small number. I did a survey of what students are paying for university on my Facebook page a while ago (check it out here) and the numbers came in between $4,000 per year and $14,000 or so for undergrads, depending on the school and whether they lived at home or not.
Young people today do not have the earning power to cover these costs over the three or four years needed to complete a degree. This is where the RESP comes in. Together with what a student is able to earn, the RESP provides a pool of money to pay for tuition, books, accommodation and such. If that’s still not enough, then student loans are an option.
The alliance of student associations reports that the average student debt load was $26,680 last year, which is large even from the perspective of a working adult. If you borrowed that much to buy, say, a car, you’d pay about $503 per month over five years, assuming an interest rate of 5 per cent.
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Investor Education: RESPs
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The load isn’t much lighter for actual students. “With that amount of debt, you would be paying approximately $305 per month, for nine-and-a-half years – including interest,” Jillian Flake, the alliance’s public relations officer, said in an e-mail.
Lately, the major banks have become part of the back-to-school spectacle by trying to sell their services to students using a parent-approved pitch that builds on the idea of helping young people become smart money managers. Invariably, students are being told to be careful with debt and to live within their means.
The big message here is that debt is okay if it helps build value or earnings power – by improving your education, for example. Debt is not okay if it’s all about having a good time in the moment. Lots of adults don’t get this concept, but we expect students to adhere to it at the same time as they’re depending on borrowed money to keep them in school.
Lessening student debt loads might help young people be smarter about debt, and the way to do that is to contribute early and often to an RESP. Why aren’t more parents doing this, assuming they have jobs and can afford to? Competition from registered retirement savings plans and tax-free savings plans is one explanation.
RRSPs are certainly vital, so don’t crowd them out to make contributions to an RESP. TFSAs are a lower priority if you’re a parent. They can wait until you have a well-funded RESP.
Many parents will never save enough to pay the whole cost of their children’s post-secondary education, and that’s fine. Earning money for university or college and even borrowing a modest amount in a good cause are worthwhile life lessons.
But definitely have an RESP going for your kids to help pay for their education. Ease your mind, and ease their way into financial adulthood.
How assets in TFSAs and RESPs compare
Contributing to a registered education savings plan is a way to help kids offset the high and growing cost of attending college or university. In fact, there's a case to be made that parents should put RESPs ahead of tax-free-savings accounts, or TFSAs. TFSAs have broad popularity, whereas RESPs are just for education saving. Still, the relative popularity of TFSAs is notable.
| RESPs and TFSAs | ||||||
| RESPs | TFSAs | |||||
| Introduced: | 1974 | 2009 | ||||
| Popularized: | 1998, when the Canada Education Savings Grant was introduced | Immediately | ||||
| Total assets to the end of '09: | $25.9-billion | $18.8-billion | ||||
| Total assets at June 30 | $26.6 billion | $29.8-billion | ||||
| (source: Canada Revenue Agency, Human Resources and Skills Development Canada, Investor Economics) | ||||||
