Dan Bortolotti, CFP, CIM, is a portfolio manager and financial planner at PWL Capital in Toronto. He is the author of Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs.
Few events bring more pride to a parent than their child’s graduation day. Completing any postsecondary program is an achievement worth celebrating, not least because your kid may soon be off the family payroll.
There are many factors affecting whether a student will go to college or university, but access to a registered education savings plan can improve the odds. A registered retirement savings plan (RESP) encourage parents to save for their children’s education by allowing them to invest in a tax-sheltered account and collect the Canada Education Savings Grant (CESG): The first $2,500 you contribute in a given year is topped up by 20 per cent, or $500, subject to certain limits.
But if the objective of the RESP program is to give a financial boost to families who would otherwise have been unable to afford tuition, then it’s getting a failing grade. The fact is RESPs are predominantly used by well-off families, many of whom would have been able to assist their children financially without the government’s help.
Granted, there have been some well-meaning attempts to shift the advantages of RESPs toward the families that need them most. In 2004, the federal government introduced the Additional CESG program, which modestly increases grants for qualifying families. For households with an adjusted income of $50,197 or less in 2022, for example, a $2,500 contribution will earn a grant of $600, instead of the usual $500.
That extra hundred bucks is lovely, but these low-income families are not able to collect any more grant money over the life of their RESP. That’s because the maximum lifetime grant any child can receive is $7,200, including the standard amount and the Additional CESG.
You’ve probably spotted the more obvious flaw with this incentive: Households pulling in $50,197 or less a year can’t be expected to direct any meaningful amount of savings into an RESP. In many parts of Canada they’d have a hard time putting food on the table. The government has tried to address this with the Canada Learning Bond (CLB) program, which is more generous. Qualifying low-income families can receive up to $2,000 without making any contributions themselves: They receive $500 simply for opening an RESP, and another $100 annually until the child is 15.
Again, a good idea, but woefully inadequate. That $2,000 (a limit that hasn’t been increased since 2004) isn’t enough to pay for a single semester of an undergraduate program. More important, reports consistently reveal many families who are eligible for the bond aren’t receiving it. Often this is because otherwise eligible children do not have social insurance numbers, or the parents have neglected to file a tax return, both of which are necessary to receive the CLB. Those problems are hard to fix. But there’s another obstacle that seems easier to remove: the one that requires families to open an RESP with a financial institution.
Lower-income parents, particularly those with poor financial literacy, simply may not be aware that they can open an RESP and receive the CLB without making contributions of their own. And financial institutions have little incentive to raise awareness: RESPs require a lot of regulatory paperwork and are probably a loss leader for banks and investment dealers. There is no business case for these firms to attract new accounts from families of modest means.
A popular alternative to banks and investment firms are the small number of RESP providers who offer group plans, or pooled plans, such as Children’s Education Funds Inc. Subscribers sign up and agree to regular contributions, with all of the investment decisions made by the plan provider. But these have their own flaws: Pooled plans are designed so those who cancel end up subsidizing those who remain until maturity, and there’s evidence early dropouts are often low-income families who simply cannot afford to continue their contributions. It’s hard to see how a survival-of-the-fittest approach advances the goal of fairer access to education.
Maybe it’s time to consider a federal education savings program that operates outside the for-profit financial services industry. I don’t have the answers here. Perhaps the government can administer its own RESP accounts for qualifying low-income families, with benefits paid automatically to those who qualify. Maybe the bonds and grants could be calculated on the basis of income and reduced or eliminated for families who don’t need them, the way Old Age Security is clawed back for high-income seniors. Any RESP reform would be difficult and controversial, but if we agree that a more level playing field is something we value, it’s worth the old college try.
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