Start sav­ing early for your child’s higher ed­u­ca­tion.

KID SMART

National Post (Latest Edition) - - FINANCIALPOST - BY ERIC LAM

Ask any fi­nan­cial plan­ner worth their salt and they’ll tell you the same thing about how to build up enough cash for your kid’s ed­u­ca­tion as they do for just about ev­ery­thing else: Save early, save of­ten.

Heck, if you can swing it, start be­fore your kid is even born.

Bar­bara Gar­bens, a fi­nan­cial plan­ner with B L Gar­bens As­so­ciates, saw her daugh­ter, Shan­non, suc­cess­fully through an un­der­grad­u­ate de­gree with­out debt last year and fig­ures she spent be­tween $80,000 and $90,000 to cover tu­ition, ac­com­mo­da­tion, text­books, equip­ment, school fees, trans­porta­tion and food. To be safe, she rec­om­mends par­ents hide away an­other 10% just in case. She started plan­ning when her daugh­ter was born, and ad­mits that the cost of post-sec­ondary school­ing was higher than she orig­i­nally es­ti­mated.

“When she was born I was ex­pect­ing it to cost about $12,000 a year in the dol­lars at that time, but by the time she was 18 the costs had dou­bled,” she said. “I wouldn’t say it was a sur­prise. I def­i­nitely had the cush­ion to ac­count for it. Since I had put money away, it was not com­ing out of my cur­rent cash flow. It was just money ap­pre­ci­at­ing, wait­ing to be used.”

But what if that ship has sailed? Un­less your cer­ti­fied fi­nan­cial plan­ner has a time ma­chine, by the time many par­ents ei­ther de­cide or can af­ford to ad­dress the prob­lem, it can feel like it is too late.

“The prob­lem with our gen­er­a­tion is we’re pro­cras­ti­na­tors. And in many of the cases we deal with we are help­ing them play catch-up so we have to be cre­ative too,” said Steve Bent­ley, a CFP from Lon­don, Ont.

Of course, your sav­ing strat­egy is quite dif­fer­ent de­pend­ing on when you start. Here’s some ad­vice from fi­nan­cial plan­ners about how to max­i­mize the time you have left be­fore your kid shuf­fles off to the hal­lowed halls of higher ed­u­ca­tion.

BIRTH TO 10 YEARS OLD

The best part of start­ing early is it gives you the most time to take ad­van­tage of the reg­is­tered ed­u­ca­tion sav­ings plan, a spe­cial tax-free ac­count with the added ben­e­fit of an­nual gov­ern­ment grants for the life of the plan, in­clud­ing the lu­cra­tive Canada Ed­u­ca­tion Sav­ings Grant. Un­der this grant, the gov­ern­ment will pay 20% of your an­nual con­tri­bu­tion up to $500 each year, or $7,200 over the life of the plan.

Over the life­time of the ac­count, you can con­trib­ute a max­i­mum of $50,000 to the RESP, which works out to about $230 a month, as­sum­ing you start at birth. To re­ceive the max­i­mum $7,200, a fam­ily will need to tuck away $36,000 over 18 years, or about $166 a month. For low-to mid­in­come fam­i­lies, the gov­ern­ment will also match as much as 40% of your con­tri­bu­tion af­ter the first $500 put into the RESP, de­pend­ing on in­come level.

This, of course, does not in­clude the earn­ings you can reap over 18 years of in­vest­ments. Re­mem­ber, this win­dow gives you time to take in up­trends in a mar­ket cy­cle and ride out down­turns as well. Ms. Gar­bens fig­ures she set aside about $20,000 to put into eq­ui­ties, and the earn­ings con­trib­uted a large por­tion to her to­tal.

How­ever, par­ents need to be care­ful not to take all re­spon­si­bil­ity out of the hands of their chil­dren, and to avoid the sense of en­ti­tle­ment a fat sav­ings ac­count can cre­ate.

“You don’t want to see a par­ent make an over­com­mit­ment and have their kid be­come a pro­fes­sional stu­dent,” he said.

10 TO 16

One of the main is­sues for young par­ents is that post-sec­ondary edu- cation seems like such a far-off prob­lem when there are more press­ing con­cerns, like a mort­gage, car pay­ments, sav­ing for their own re­tire­ment and, in­creas­ingly, their own stu­dent debt.

How­ever, start­ing late is still bet­ter than not at all, even if you can’t hit that $80,000 tar­get.

“Peo­ple of­ten look at the prob­lem, they think it’s a lot of money, it’s hope­less, so they give up com­pletely. In­stead, they should look at it as, ‘Maybe I can’t pay for the whole thing but if I can do some­thing it will help,’ ” Stephen Re­ichen­feld, a wealth coun­sel­lor with the Fidu­ciary Trust Com­pany of Canada, said in an in­ter­view. “To hit $80,000 you’ll need to put away about $680 a month, and that’s an enor­mous amount. It re­ally il­lus­trates the power of com­pound­ing.”

At this point, just putting money into a sav­ings ac­count is “wast­ing op­por­tu­ni­ties” so par­ents should con­sider some­thing with a higher earn­ings ceil­ing, within their risk tol­er­ance.

“Par­ents should also set up a TFSA for their child,” he said. This gives an­other $5,000 of tax-free room. How­ever, gov­ern­ment grants do not qual­ify, so a TFSA is only valu­able if you max out the RESP first.

An­other im­por­tant fac­tor to con­sider is that the rules for the CESG change be­fore your child turns 16, and the grant ends when they turn 17.

Es­sen­tially, par­ents must ei­ther con­trib­ute $2,000 to­tal or at least $100 in any one of four years be­fore the child turns 16. So if you want any piece of the grant, you need to open an RESP by the time your child is 15.

17 TO 18

Not sur­pris­ingly, op­tions are rather lim­ited at this point.

Chil­dren are still el­i­gi­ble to be named a ben­e­fi­ciary in an RESP un­til they turn 21, but will not be el­i­gi­ble for the CESG or other grants.

“I would en­cour­age them to de­fer a year, make up some of their own sav­ings by work­ing,” Mr. Re­ichen­feld said. “There’s not much dif­fer­ence grad­u­at­ing at 22 in­stead of 23. For one thing, I worked a year af­ter Grade 13, so don’t be so hung up go­ing straight to univer­sity.”

Par­ents and their kids should also look at schools a lit­tle closer to home, as res­i­dence costs can add at least $10,000 a year to the tab, he said.

Stu­dent loans are widely avail­able and at­trac­tive as stu­dents ac­cu­mu­late no in­ter­est and do not need to pay un­til they grad­u­ate. How­ever, in­ter­est rates are puni­tive.

Loans are a com­bi­na­tion of fed­eral and pro­vin­cial loans. In On­tario, the pro­vin­cial rate is prime +1% (4%) while the fed­eral rate comes in two forms: the fixed rate is prime +5% (8%) while the float­ing rate is prime +2.5% (5.5%).

One al­ter­na­tive, if you’re will­ing to take the risk, is to take out a se­cure line of credit, on your house, for ex­am­ple, and use the cash to pay for school­ing costs.

“With a line of credit you use it as you need it. Bet­ter off than sud­denly grad­u­at­ing with $70,000 in loans,” he said.

Mr. Bent­ley is also in favour of de­fer­ring, as it gives stu­dents more time to make a de­ci­sion on what they want to do with their life. And when you and your child are fac­ing a short­age of funds, find­ing your­self is a lot more affordable if you’re not do­ing it at the same time as pay­ing for tu­ition.

“It’s a big, ex­pen­sive prob­lem. We’re push­ing our kids to make choices when they’re not old enough to,” he said. “Ul­ti­mately, you’re mak­ing a com­mit­ment to an ed­u­ca­tion. You’re not just writ­ing a cheque.”

BRETT GUNDLOCK / NA­TIONAL POST

Bar­bara Gar­bens and her daugh­ter, Shan­non Moir, in front of their Toronto home. Gar­bens es­ti­mates she spent $80,000 to $90,000 in help­ing her daugh­ter grad­u­ate with no debt.

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