Cashing in for school

Investors should treat like and get more conservative as their children get closer to needing the funds for their higher education

Your child is ready for university, but you had a really bad year in the market. Now what?

“Sorry, kid, you’ll have to wait until my stocks turn around before we can afford to send you to university.” It doesn’t sound like an ideal response.

A registered education savings plan is like any investment: timing is key. An RESP comes with the advantage that Ottawa matches contributions with a 20% grant up to $500 per year to a maximum of $7,200 lifetime, so there’s no debate about whether to have an RESP. But how to invest the money is open for discussion.

Peter Lewis, vice-president, regulatory and corporate, at Canadian Scholarship Trust Foundation, says it runs a plan for consumers that has a conservative model by investing in bonds. It recently received permission to include 25% equity in its holdings. “When we’ve talked to average investors, they want a safer investment. They know they’re already getting 20% from the government,” Lewis says. “They don’t need 8% to 10% returns; they are happy with 4% to 5% returns.”

There’s nothing to stop you from having a self-directed RESP, since every major financial institution will let you set one up. Invested properly, you can avoid a lot of high fees, but the onus is on you to make sure your market timing fits your child’s post-secondary years.

“There were lots of stories in 2008-2009 of folks that saw 30% of their child’s education fund disappear and they needed the money at that point in time because their child was going to school,” Lewis says.

Keep in mind that an RESP is similar to an RRSP in that you want to be a little more conservative as you get closer to needing the money. In this case, it’s for school not retirement.

Jeanette Brox, a certified financial planner in Toronto, says she generally has clients heavily invested in equities from birth. “You have a long time horizon when they are just born, but when they are 14, then I start saying, ‘Okay, I can’t guarantee what the market will do, nobody can, so why don’t we start moving into a more balanced approach?’” Brox says.

A family RESP requires you to adjust that portfolio based on the different ages of your children. You might be half as conservative as you normally might be when one child turns 14, knowing the plan is intended to support another kids in school as well.

As an aside, it’s worth having a discussion with your children about their post-secondary plans. If they want to put off school for two years, that changes your entire investing time horizon. “It’s always about rebalancing and that’s a discussion you need to have every year,” Brox says.