All of you new parents, you had better put away those celebratory cigars and start saving.
At a time when Canadians are grappling with high levels of credit card debt, soaring house prices and troubling pension trends, it appears new Moms and Dads need to add skyrocketing higher education costs to their financial to-worry-about list.
In 18 years, when a baby born today goes to university to start an undergraduate degree, the total cost of a four-year program for a student living away from home will be $137,013, according to a recent Toronto-Dominion Bank Financial Group report. The bill for students still bunking with their parents will be a slightly-less-shocking $101,426.
TD deputy chief economist Craig Alexander, who co-authored the report, said the inflation-adjusted projections are not meant to scare parents. "From a financial planning point of view, the message is that there is a big expenditure facing them down the road. There are a lot of hard decisions that will need to be taken around this subject but ultimately, it needs to be factored into a financial plan."
Although a university degree has a huge cost, the potential payoff in terms of life-long earnings and job opportunities make it a phenomenally good investment, Mr. Alexander said. According to the 2006 census, individuals with a bachelor's degree had median earnings of $56,048, well above the $37,403 people with only a high school diploma earned.
"Higher education also raises the probability of employment, reduces the odds of unemployment, tempers the duration of unemployment if unemployment occurs, and increases the ability to do lifelong learning," the TD report said.
So how can parents save for a child's higher education?
Sara Kinnear, a tax and financial planning expert with Investors Group in Winnipeg, says the first thing families should do is eliminate unnecessary spending and establish a budget.
"There is a limited amount of dollars in a family so it is a matter of establishing priorities," she said. "You might not be in a position to entirely fund your child's education, but you can give them some help."
For a list of education-saving tips from Ms. Kinnear, click here.
The best financial savings tool for parents is a registered education savings plan (RESP). Until their children are 17, parents can stash up to $2,500 a year into the tax-sheltered vehicle, a contribution the federal government matches with a 20-per-cent grant - or up to $500 per child a year - with a lifetime maximum of $7,200. (Lower-income families can get as much as 40 per cent in grant money if they contribute less than $500 a year to an RESP.) The money in the RESP can then be invested, which will hopefully increase the amount parents will have to pay for postsecondary schooling.
Parents who have maxed out their RESP limit can also put up to $5,000 a year for their child's education into a tax-free savings account. Unlike an RESP, they will not pay any tax on withdrawals.
Balancing saving for retirement and education
The problem is that not all parents have $2,500 a year to put into an RESP, much less the $5,000 for a TFSA. "Whereas in past decades, it was possible for some parents to save for retirement and post-secondary education, the growing size of this expenditure means many families will not be able to save for both," Mr. Alexander said. "Maybe that will have an influence on what school the child goes to or whether the child goes away from home to school or stays at home."
Caroline Nalbantoglu, a financial planner with PWL Advisors Inc. in Montreal, says her advice to parents who can not afford both is to save for retirement. "You get a tax deduction from your RRSP, so you get more bang for your buck. But with the RESP, aside from the 20 per cent contribution from the government, you don't get any tax reduction."
Nevertheless, Ms. Nalbantoglu says higher education is a major financial goal for most of her clients, who would like to avoid seeing their kids saddled with large amounts of student debt. "That can really start them off on the wrong foot."
A majority of students are already finishing school strapped with debt burdens that make it difficult for them to buy a house, get a mortgage or pursue graduate studies, said Arati Sharma, national director the Canadian Alliance of Student Associations. She pegged the debt load of an average undergraduate finishing a four-year degree today at around $25,000.
Robert McCullagh, a CFP with Calgary-based Benefit Planners Inc. and a financial planning instructor at Mount Royal University, said parents would be smart to start saving for education early, even if it is only a little each year. "To put side even a small amount will eventually become significant."
Parents, meanwhile, can ask friends and family to substitute birthday and Christmas presents with contributions to a child's RESP account. "My kids have little recognition of the toys they received, but the money in their RESPS has a longer-term benefit," Mr. McCullagh said.
The kids can also help out by applying for scholarships and bursaries and by working summer or part-time jobs, he added.
Crunching the numbers
The TD study forecast that in 2027, students who leave home to start a four-year undergraduate university degree will need to pay $64,363 for tuition and other academic expenses (such as books and various academic fees) and $72,650 in living expenses for a total of $137,013. Students who live at home will face bills of $64,363 for tuition and academic expenses and $37,063 for living expenses for a total of $101,426.
"The core academic fees will be about $64,000. So the real issue is if a student moves away from home to go to school, now you are looking at rent and transportation and many other costs you would not otherwise incur," Mr. Alexander said.
Nevertheless, that represents a big jump from the $77,132 and $51,763 it costs today in 2009 dollars for students pursuing an undergraduate degree away from home and at home, respectively.
TD based its 2027 forecast on an annual inflation-adjusted rate of 2.9 per cent for students living away from home and 3.5 per cent for student living at home over the next 18 years. The report assumed that tuition fees as well as additional compulsory fees would increase at a rate of 5 per over the projection period due to lower university enrolments, decreased ability for provincial governments to raise tax revenues as the population of baby boomers retires and increased government attention on health care, which will diminish funding for education.
Mr. Alexander also noted the large discrepancies in tuition fees, which vary by province and program of study. For example, during the 2008-2009 academic year, the national average undergraduate tuition fee for Canadian full-time students was $4,7242, but varied from a range of $2,167 in Quebec to $5,932 in Nova Scotia. During the same academic year, average undergraduate tuition fees varied from $3,666 in the faculty of education to $12,906 in the faculty of dentistry.
Roma Luciw is a writer and web editor of the Globeinvestor.com personal finance site. Please send any comments and story ideas to firstname.lastname@example.org.