Start saving early for your child’s higher education.
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.”
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.