If you're hoping that your child will be eligible for a scholarship to help pay for postsecondary education, think twice about encouraging him or her to apply to Bishop State Community College in Alabama. In the recent past, Alabama state officials identified abuses in the school's financial aid program that saw more than $200,000 in scholarships awarded to relatives of employees of the school who didn't attend the school, including a 67-year old disabled grandmother.
Turns out that the grandmother received scholarships in three sports, but passed away shortly after the paperwork was completed. Dreams of seeing Grandma pole-vaulting ended quickly.
When it comes to paying for a postsecondary education, I like to talk about the five key ways to cover the costs: begging, borrowing, stealing, sweating and saving.
Sound confusing? Let me explain.
Begging
This method of paying for an education isn't as bad as it sounds. I'm talking about looking for "free" money by a student applying for scholarships, bursaries, awards, grants, fellowships and stipends. The student in your life should start applying a year in advance for scholarships. Start with your employer to see if funding might be available. Also, be sure to check out www.scholarshipscanada.com for free money. All of this assumes your child is qualified for certain awards and has the persistence to apply for several scholarships and follow-up afterward. There's no limit on the number of scholarships a student can apply for – so go for it.
Borrowing
One of the most common ways to pay for an education is to borrow money. If your child is going to do this, I suggest following the "Rule of Tens": Cap the amount your child borrows to pay for postsecondary education at a level that's related to the income the student expects to earn later. Specifically, the Rule of Tens suggests that for every $10,000 in student debt, the student needs to earn $10,000 over a base income of $10,000 to be able to pay off that debt in 10 years. So, if a student graduates with $30,000 of debt, he or she ought to earn $30,000 over a base of $10,000, for a total of $40,000, in order to pay off that debt in 10 years. Last week, I spoke about different types of schools and academic programs, and average levels of income for each following graduation, which will be helpful in figuring out how much student debt is prudent. (Read that article here: tgam.ca/ELQD)
Stealing
No, I'm not talking about planning a bank heist or some crazy shoplifting scheme. "Stealing" to pay for an education simply involves mom and dad stealing from other resources to help pay the cost. This might include dipping into retirement savings, selling the family cottage or otherwise selling off assets to pay for an education. My best advice is this: Your retirement savings should be a higher priority than paying for your child's education. I say this because there are other ways to pay for that education. Stealing from your other resources should be an absolute last resort. This strategy assumes you have other assets to draw on.
Sweating
This strategy involves a student working part time to help pay for the costs of education. Working during the summers, part time during the school year and perhaps as part of a co-op program (where students work a few months at a time as part of their academic program) can make good sense. As a general guideline, a student will have a tough time with school if he or she is working more than 15 hours a week while attending school full time. This strategy assumes the student will have the time and skill to work at an appropriate job – and can find employment.
Saving
This is arguably the most effective approach to paying for an education. It assumes you have the discipline to set aside money, perhaps monthly, to create savings for a child's education. Use a registered education savings plan (RESP) as a first approach to saving. After all, your contributions to an RESP will generally be topped up by way of a Canada Education Savings Grant from the government, which will equal 20 per cent of the amount you contribute to a maximum of $500 for each year ($7,200 in a lifetime for each student). If you can set aside $2,500 a year for each student from the time he or she is born you'll maximize the CESGs and it will go a long way to paying for a postsecondary education.
Finally: You'll likely use more than one of the methods above to pay for a student's education. So plan which methods work best for you.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.
Tim Cestnick