Investing in education fund is just the smart thing to do
Grant guarantees a 20% return to help pay post-secondary costs
A global survey commissioned by HSBC on the value of education revealed that 85 per cent of parents currently contribute to funding their children’s university or college education, while almost four in 10 of the parents surveyed wish they had started saving earlier and put more money aside for their children’s education.
A post-secondary degree is expensive; at the topend, a four-year degree costs nearly $60,000 in today’s dollars. In 18 years, expect those costs to exceed $100,000.
That’s why parents should make it a priority to set up a Registered Education Savings Plan (RESP) for their child soon after he or she is born.
RESPs are the second-best investment opportunity going today, next to an employer-matching RRSP program.
Where else can you get a guaranteed 20-per-cent return on your money?
That’s right, the federal government kicks in 20 cents for every dollar saved in an RESP, to a maximum of $500 per year on $2,500 saved through a program called the Canada Education Savings Grant (CESG).
Parents have lots of competing financial priorities and so putting a child’s future education needs ahead of today’s needs, such as mortgage payments, transportation costs, daycare expenses, not to mention contributions to their own retirement savings, can make for difficult choices.
Indeed, to fund their child’s postsecondary aspirations, 40 per cent of parents surveyed have reduced their expenditures on leisure activities, 21 per cent have worked extra hours in their job and 20 per cent have contributed less toward their own long-term savings or investments.
So how can parents help? The most important step is the first one: open an RESP account and start off with small monthly contributions. You’ll get access to the Canada Education Savings Grant and Canada Learning Bond (other provincial grants may also apply).
Avoid group RESPs and Scholarship Trusts — they’re loaded with restrictions and fees. These types of plans are often sold at trade shows and aggressively pushed over the phone and door-to-door.
Do yourself a favour and set up an RESP plan through your bank instead. Parents who plan to have more than one child should opt for a family plan, rather than an individual plan.
If you have the means to put away $200 per month from the time your child is born until he or she turns 18, you’ll end up with $83,808 saved. That assumes 5-per-cent annual growth, plus the $480 CESG that you’ll get from the government each year.
Increase your contributions as your income allows, but don’t feel it’s necessary to max out your contributions ($2,500 annually, per child) in order to make a difference. Even setting aside $100 or $150 per month adds up to big savings.
There’s a lifetime contribution lim- it of $50,000 per beneficiary. But outside of receiving a large inheritance, there is little point contributing more than $2,500 per year — the amount needed to maximize the CESG grant.
For late starters, RESP rules let you catch up one year of contributions each year, in order to take advantage of the grant. For example, if you haven’t contributed for the first five years, in each of the following five years you can double your maximum contributions, so you could put in $5,000 and get $1,000 worth of grants and use up your unused contribution room.
What you can’t do is contribute $20,000 in one year to get the grants from the previous five years. So once your child reaches the age of 10, you’ve run out of time to catch up and max out the grants.
Too many parents have the mindset of, “I didn’t have any help and I turned out just fine.” If you have the means to help your children — not just with a blank cheque but also with guidance and support — then why not give them a leg up?
Think of RESPs as insurance — protection from the chance that your debt-ridden adult children will have to resort to moving back home after graduation because they can’t afford rent.