There’s no shortage of news stories warning about the ever-increasing cost of tuition and it might make the idea of saving for your child’s education seem a bit intimidating. However, while the cost of education is rising fast, there is a tool that can help you keep up—the registered education savings plan (RESP).
University tuition fees in Canada have risen 40 percent in a decade, forcing many students to embrace student loans. According to the Canadian University Survey Consortium, the average student debt rose to $13,331 in Canada as of 2015, and that number doubles to $26,819 if you exclude students lucky enough to have no debt.
How is it that some students graduate without any debt? There are a number of factors, including scholarships, loans, and summer jobs, but an important tool many use is the RESP.
The RESP sounds a bit like an RRSP, and that’s no coincidence. In both accounts, your contributions grow tax-free. However, with an RESP you do not deduct your contributions. Instead, the government matches a portion of your contributions with the Canadian Education Savings Grant (CESG). The CESG matches 20% of your contribution, up to a maximum of $500 per year.
Basically, it's free money.
And if you think you’re not eligible to participate because you don’t have money to contribute, well it gets even better.
For low-income households, there is something called the Canada Learning Bond (CLB). The CLB can provide up to $2,000 in funding from the Government of Canada directly to your child’s RESP. It is designed to help Canadians with more modest incomes still benefit from the opportunity offered by an RESP.
The unique benefits of an RESP can be life changing. However, the sad truth is that the participation rate in RESPs is less than half, meaning that 50% of Canadian children are missing out on free money to fund their education. That’s a loss of a potential $7,200 in CESG, up to $2,000 in CLB, and the tax-deferred growth of that money over time.
No matter how much you contribute or receive in government grants, it may just be a drop in the bucket if it doesn’t keep pace with the rapidly growing cost of tuition. So let’s crunch some of the numbers with the assistance of the RESP savings calculator at GetSmarterAboutMoney.ca to find out if you can actually pay for your child’s full education with an RESP.
For these calculations, let’s assume that you live in Ontario, and that your child lives at home while attending university. Knowing that compounded investment returns work best with time, for this example we’ll assume that you started the RESP when your child was born and they’ll be attending a four-year program starting at age 18.
The calculator uses a current value for tuition of $7,539 and projects a 4.5% annual rise in tuition costs. As your child will be living at home, the calculator doesn’t project any extra room and board costs related to university beyond what you were paying already.
Lastly, let’s assume that your investment grows at 5%, and that your family income is more than $44,701 but less than $89,401, meaning you aren’t eligible for the Canada Learning Bond. In order to max out the CESG grants received, you contribute $2,500 annually.
The results are clear and positive: The full cost of your child’s education in this example will be $71,230.69.
Over the lifetime of the RESP, you will have saved a total of $101,008.26 (combining your contributions, the CESG grants, and investment return).
This means you will have saved $29,777.57 more than you needed in this example, which can help give you a financial safety net in case tuition or related costs increase faster than planned.
In other words, if you start early enough, you might be able to save more than you actually need to fund your child’s education in an RESP. As you can see, the numbers work out to a happier ending than you might have thought.
If you’re starting later, or if your child is already going away to school don’t lose hope. Your RESP account can still help you save funds and prepare for the tuition expenses that will be coming—while also limiting the need for student loans. After all, would you prefer to be in the 50% of people taking advantage of free government grants, or the 50% who are not?
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Any results or calculations in this article are for information purposes only, and do not constitute financial or legal advice.