Like many Canadian parents, Alfredo Monteverde was determined to help pay for his children’s postsecondary education. The Venezuelan-born small-business owner, who came to Canada in 1992, didn’t have enough money to start a registered education savings plan for his eldest son, but he made maxing out RESP contributions for his other two sons a financial priority.
Mr. Monteverde paid his first son’s full tuition out of pocket, while his other sons relied on the RESP savings he had built up to fund their studies. Although he has paid for their undergraduate degrees, any graduate studies will be funded by student loans, says Mr. Monteverde, who lives near Ottawa.
“We are debt-free and I want to have money in retirement. I’d like to smell the roses – not create anxiety,” he says.
Many Canadian parents, some in their late 50s and early 60s, are wrestling with whether and how to fund their children’s postsecondary studies at a time when they should be focused on paying down debt or building retirement savings. Despite initially planning on paying the full cost their children’s university or college costs, they’re realizing that they’re coming up short – a function of having kids later in life, higher tuitions at postsecondary institutions and inadequate RESPs. And their plans for a comfortable retirement are under threat.
“Many people are struggling with the decision of how much to pay – and the degree to how that impacts their future,” says Rona Birenbaum, a certified financial planner in Toronto. “This is creating financial tension around education.”
Ms. Birenbaum says that many parents are fully committed to paying for everything – tuition, books, living costs – because their own parents did that for them. She says they often tell her: “I don’t want my children living in debt.”
Yet they often don’t realize their RESP savings are inadequate. “A four-year degree [at a university out-of-province] costs $80,000 to $100,000 – that’s after-tax money,” Ms. Birenbaum says. “And it’s not just the capital – it’s the growth of that capital.” RESPs have a lifetime contribution limit of $50,000 per child.
Tuition for masters programs in Canada is $7,056 a year (2019-20), according to Statistics Canada. PhDs are usually $10,240 each year for years one and two, with teaching assistantships helping offset costs after that.
Despite being presented with a financial plan that illustrates how paying in full will affect their future – and might be detrimental to their retirement – many of Ms. Birnbaum’s clients tell her they will just work longer.
But Ms. Birenbaum often suggests parents look at ways of cutting costs, such as encouraging their children to study at a local university rather than going out of province or out-of-country – which can save $40,000 over four years.
Another option is to have students contribute to the cost of their postsecondary education, such as putting aside a portion of their income from summer jobs.
Mr. Monteverde is a firm believer in accountability. When his youngest son dropped out of university and started working in the food industry, Mr. Monteverde made him return the money. “Every month, he paid $100 until he paid it back,” he said.
Gary May is taking a similar approach with his two daughters. Although he saved money in several RESPs over the past decade to fund a portion of his children’s education, his older daughter, who is set to attend university next fall, got a part-time job at a hardware retailer nine months ago to cover living expenses.
“It really instills in them a process to think about the future,” says Mr. May, who lives in Cambridge, Ont. He plans to fund the first year of his daughter’s education at 80 per cent, the next year at 75 per cent and so on.
Mr. May’s strategy will certainly help ease his retirement – which can be significantly eroded if parents pay in full, says Kurt Rosentreter, senior financial adviser and portfolio manager at Manulife Securities Inc. “I have a lot of clients with lines of credit to pay for tuition,” he says, as well as stock options or annual bonuses. As they pay down lines of credit to fund tuition, they’re not putting that money aside for retirement.
But having kids take on all of the costs by taking out loans is a strategy that can also backfire, he warns. Many with high family incomes simply won’t qualify for a loan. Others will amass a huge debt load.
“Do you want them at 28 to graduate with $200,000 in student debt?” he says. “They won’t be able to buy a house for 15 years.”
Mr. Rosentreter suggests people draw up financial plans based on their age to ensure they will have enough for retirement. For those parents in their 40s working with two incomes, he suggests that they each start saving $200 a month in a tax-free savings account: “It becomes a second RRSP with different tax breaks.” He says the goal is to max it out before the kids go to postsecondary school.
For parents in their 50s with kids already in university, with RESPs that are running out, the news isn’t so good. In this case, “you might be working until you’re 70,” he says, or a lifestyle adjustment will be necessary. He counsels clients to avoid expensive home renos and buying vacation properties.
He advises couples to sit down with an accountant to determine exactly what postsecondary education will cost – and how to continue saving for retirement as aggressively as possible.
Mr. Monteverde, 54, is confident as he heads into his final decade before retirement. His wife, a teacher, has a solid pension and he is on track to save $2-million in RRSPs. He has moved from the city to the countryside to reduce living costs. “I’m not worried,” he says.
“There’s no right choice,” Ms. Birenbaum says. “There’s only the choice that feels right for that family.”