Did you know that the average student debt load in Canada is $27,000? As thoughts turn back to school, here’s one more thing I want you to think about: how are you going to pay for your child’s university education? “But Peter,” I can hear you saying, “My child already has an RESP!” If they do, great! But if they don’t or you’re not taking full advantage of an RESP, keep reading.
I’ll tell you why an RESP can be a beneficial savings tool for your child’s education and why you should open one as early as possible.
College, university and trade schools can be expensive. The average cost for a year of undergraduate studies in Canada was $6,400 last year. That’s a 40% increase from a decade earlier and it’s not going to come down. Throw in room and board, and the bills get bigger. I won’t even mention the numbers in the US… they’re so big you might just stop reading!!!
And while there are other ways to pay for school, an RESP gives your child a solid financial cushion when they start school, so they can graduate debt-free or with very little debt. It’s a great way to give your kids an advantage after they graduate. Do I have you convinced yet? Ok, so let’s take a look at how an RESP works!
How does an RESP work?
An RESP or Registered Education Savings Plan is an investment mechanism that is used to save for a child’s post-secondary education in Canada. It lets you save and invest that money until your child is ready to use it.
Now it might seem like RESPs are for parents to save for their child’s education, but grandparents, uncles and aunts can also help by opening an RESP! Just avoid opening more than one [RESP] per child because it makes it much more difficult to track contributions and grants.
Once you or a family member opens an RESP, you can contribute up to a lifetime maximum of $50,000 per child, but you’re not the only one putting into the plan. The federal and Quebec governments have incentives and grants that can add a substantial amount to your child’s plan.
So how much would they contribute? Let’s talk some numbers.
Up until the calendar year your child turns 17, the federal government contributes what’s called the Canada Education Savings Grant or CESG. CESG matches 20% of every dollar contributed, up to a maximum of $500 against a contribution of $2,500. Each child can receive a maximum of $7,200 of CESG in their lifetime, equal to just over 14 years of $2,500 contributions. Got that?
In other words, if you contribute $2,500 every year of the child’s life until age 17, you would stop receiving CESG in the 15th year of the plan.
Now, most people know about Quebec’s subsidized daycare system, but far fewer are aware of the fact that Quebec also chips in with RESP grants. Saskatchewan and B.C. are the only other provinces to do this, and B.C.’s plan isn’t as good. With the Quebec Education Savings Incentive or QESI, RESP accounts can receive an amount equal to 10% of the net contributions paid into it up to a maximum of $250. It’s exactly like the CESG, only half the amount.
Both plans have carry-forward provisions, so you can get the maximum federal and provincial grants even if you miss a contribution in one year. In other words, in any given year, you can double up the $2,500 contribution in order to catch up on a previous year of grants you may have missed. This applies to both the Federal and Quebec plans.
The best part about having an RESP is that the savings grow tax-free inside it. You can invest the funds inside an RESP in the same way you would a TFSA or RRSP using ETF’s, stocks, bonds, mutual funds or GICs. As you would with your portfolio looking forward to retirement, you should take more risk in the early years with a higher percent in equity, while your child is still young, and gradually reduce the risk as your child gets closer to age 19 or 20, when they’ll need the money to pay for school. As the child nears university age, you likely want to shift the investment mix towards more bonds and less equity.