How parents are saving for kids’ education amid rising costs

Open this photo in gallery:

Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.

Some Canadian parents are “stretching themselves thin” to save for their children’s education amid decades-high interest rates and a higher cost of living, according to a recent survey. But advisors say there are strategies to lessen the financial burden while still making the most of the registered education savings plan (RESP).

An Embark Student Corp. survey of 1,000 parents released in June found that 81 per cent of them believe it’s their duty to help their children pay for their education. However, 73 per cent felt it has been harder to save given higher prices and living expenses. More than half (52 per cent) of survey participants said they’d go into debt to pay for their child’s education.

“I’m speaking to a lot of parents [who] are having to make choices now. Whereas before, it was a given they were going to contribute to an RESP or some savings vehicle for their kids’ education,” says Leslie Gottlieb, senior financial advisor and founder of Bright Start Financial in Toronto.

She notes that for some clients, saving for their kids’ education may be “lower on the list” in comparison to other financial goals.

Dan Bortolotti, portfolio manager with Bender, Bender and Bortolotti at PWL Capital Inc. in Toronto, says he hasn’t had to advise any financially stretched parents yet. However, he thinks it’s important to inform clients that RESPs give them the ability to make catch-up contributions for missed years and still receive the Canada Education Savings Grant, which matches 20 per cent of parents’ annual contributions up to a maximum of $500 per year, or $7,200 total.

“If you missed a past year, you can contribute $5,000 one year and get $1,000 in grants,” he says.

“Maybe you’ve just bought a house or had some big expense one year and just don’t have the cash available, next year just double up … I’ve definitely had clients who’ve done that.”

Aravind Sithamparapillai, associate with Ironwood Wealth Management Group in Fonthill, Ont., says parents with multiple children who are feeling the pinch should prioritize contributions for their eldest child given the limited time window on the savings vehicle rather than dividing a limited amount of money evenly between two or three children.

And if parents are short on cash and have to consider prioritizing one financial goal over another, Mr. Bortolotti recommends RESP savings over tax-free savings account contributions given the automatic government grant. Ths particularly applicable to parents whose children are in their teens and only have a few years left to save or catch up on a skipped year.

“If a child is three or four years old, it’s okay if you miss a year or two,” he says. “There’s lots of time to catch up and you can still collect the maximum grant.”

How to prioritize financial goals

If the choice is between RESP and registered retirement savings plan (RRSP) contributions, the calculation is more tricky. Mr. Bortolotti says the question depends on the client’s marginal tax bracket and age.

For those in the highest tax bracket or in their peak earning years, prioritizing RRSP savings may make more sense, but younger parents and those in a lower bracket won’t benefit from as significant a tax refund and could prioritize education savings.

In some specific cases like parents who need to pause contributions for a year or two – such as those who are anticipating renewing their mortgage at a much higher rate in a couple of years and want to prioritize paying down that debt – but have an eldest child approaching university age, they may be able to take advantage of a nuance in the family RESP rules, Mr. Sithamparapillai says.

Family RESPs don’t require parents to withdraw the government grants in accordance with each child. When they’re ready to save in the RESP again, parents could make catch-up contributions evenly to each child to get the government grant match for all children but pool the grant money and withdraw it in the eldest child’s name up to the $7,200 maximum.

Mr. Sithamparapillai acknowledges this would mean they have less grant money to pull out for their younger children, but this approach is typically most helpful for parents who wouldn’t have been able to make the maximum contributions regardless.

Rising costs for education and housing

Even if parents are saving the maximum amount and they need to get the full government grant each year, it likely won’t be enough to cover the cost of their kids’ education.

Tuition fees for Canadian undergraduate students rose 2.6 per cent year-over-year to an average of $6,834 for the 2022-23 school year, according to data from Statistics Canada. But housing costs – whether in student residence or an apartment off-campus – are likely to be the biggest draw on RESP savings. On-campus housing tends to cost between $8,000 and $17,000 a year.

The Embark survey found 87 per cent of parents consider post-secondary education “increasingly unaffordable,” and 69 per cent believed their child wouldn’t be able to afford it without parental assistance.

“The RESP is woefully inadequate in keeping pace with inflation and the increasing cost of education, but I don’t see that changing anytime soon,” Mr. Bortolotti says. “The government has been pretty clear it has no interest in enhancing the RESP program.”

However, he says parents who’ve contributed the maximum amount should expect to see between $60,000 and $80,000 in the account by the time their child goes to school, which would get them “most of the way” to a fully covered university or college experience. And even for parents who can’t contribute the maximum amount, it’s still a worthwhile plan.

Ms. Gottlieb’s two daughters are currently attending university and living away from home, and she says it has been “the shock of my life financially, and look at me, I’m an advisor. I have a spreadsheet to track everything because it’s not what I anticipated at all.”

She says parents whose children live at home while going to school could likely cover the full cost of their education if they contributed the maximum amount necessary to receive the full government grant.

For more from Globe Advisor, visit our homepage.