- The rate at which post-secondary tuition costs are increasing
- How you can save for your child’s education and help them avoid excessive student debt
- Whether the Registered Education Savings Plan (RESP) can help you pay for your child’s education in full
Saving for your child’s education is more important than ever. Every year it seems that the cost of tuition is climbing higher, and the burden of student loans seem to be more inevitable for each generation. While tuition costs are rising fast, there is a tool that can help you keep up: the Registered Education Savings Plan (RESP).
This article has been updated with additional information, including 2018/2019 loans and tuition figures.
According to Statistics Canada 2008 and 2018 reports, university tuition fees in Canada have risen over 44% in the last decade, forcing many students to embrace student loans. This is even higher for some programs such as pharmaceutical (up 144%), law (up 85%), and dentistry (up 78%). In 2018, the average student debt rose to $13,925 in Canada, and that number more than doubles to $27,929 if you exclude students lucky enough to have no debt.
How do 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 an RESP.
Getting a little RESP-e-c-t
It’s no coincidence that the RESP sounds a bit like an RRSP. In both accounts, your contributions grow tax-free. However, with an RESP your contributions are not tax deductible. 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.
On top of that, if your household income is under a threshold ($47,630 as of 2019), you will qualify for the Canada Learning Bond (CLB). The CLB provides up to $2,000 in funding from the Government of Canada directly to your child’s 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, only 41.3% of Canadian children are receiving the 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.
But what if your child doesn’t end up pursuing a post-secondary education? You’ll still be able to withdraw the money, but you’ll have to return the grants and will need to pay tax on the amount of interest or investment return accumulated in the account.
Taking a look at the numbers
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 value of $8,838 for this year’s tuition and projects a 4.5% annual rise in tuition costs. It also assumes your child will be living at home, so it 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 $47,630, 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: Over the lifetime of the RESP, you will have saved a total of $100,092.14 (combining your contributions, the CESG grants, and investment return). This is more than enough to cover the estimated $83,504.02 tuition cost.
This means you will have saved $16,588.12 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, and can help to subsidize other education costs such as books or transportation.
In other words, if you start early, 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. An 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 41.3% of people taking advantage of free government grants, or the 58.7% who are not.
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The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.