Coping with the high cost of college
I’m of two minds when it comes to student loans. On the one hand, I recognize that they make postsecondary education possible for less affluent young people. On the other, I’m appalled by the idea of graduates starting their working career tens of thousands of dollars in debt.
At a time when governor Mark Carney of the Bank of Canada is berating us for running up record levels of household debt, the Ontario government is handing out up to $7,300 a year in student loans. When they finally graduate, these kids are financially crushed.
I get emails all the time from graduates who are struggling to pay off their student debt load. It’s especially difficult if you’re starting a family at the same time.
But what’s the alternative? University costs are sky-high. Check out the University Cost and Debt Calculator on the Investor Education Fund website at www.getsmarteraboutmoney.ca. Pick any university you want across Canada, choose a degree, and get ready for a shock when you see how much it will cost.
For example, a four-year engineering degree from Queen’s will set you back a mind-blowing $77,316! And those expenses will be much higher when the elementary school kids of today are ready for college.
When I went to college (a long time ago) the costs were nowhere near that high. But neither was there a government loan program to help. If your parents didn’t have enough money or you didn’t win a big scholarship, you took a year or two off, as I did, to work and save. It wasn’t easy but when you finally got a degree it didn’t come with a big loan repayment bill appended.
Now that the new Parti Québécois government in Quebec has repealed the tuition increases proposed by the Liberals, some students want Premier Pauline Marois to take the next step and make university education free. It’s an attractive egalitarian idea. The problem is there is not enough money to make it happen. Universities cost money to operate and maintain. The kids in Quebec, and everywhere else, better get used to it.
Parents with young children have an option to ease the coming financial strain. Open a registered education savings plan (RESP) while the kids are young. These plans have been greatly improved in recent years and the addition of the Canada Education Savings Grant (CESG) means the federal government contributes to your child’s university fund to a maximum of $7,200 over the life of the plan. RESPs have been around for many years but didn’t attract much interest until the mid-1990s when tuition fees began to skyrocket. Even today, the take-up rate for the CESG is only about 43 per cent, which means the majority of Canadian parents are not receiving it. An RESP is a government-approved tax shelter specifically designed for education savings. However, contributions to an RESP are not tax-deductible. Any money that goes into the plan is contributed on an after-tax basis. Once in the RESP, any future investment income that is earned is tax-sheltered. However, when students withdraw cash to fund their education, the income is taxable in their hands. You may set up an RESP for a child or grandchild at any time. There is no maximum annual contribution but the total cumulative amount of the contributions cannot exceed $50,000 per child. You can create either a family plan, which covers all your children, or a specified plan for one child. RESPs can be set up by parents, grandparents, or other relatives.
Although the Income Tax Act says the proceeds from an RESP must be used for education, there are no hard and fast rules as to what costs it actually covers. Generally speaking, education payments include tuition fees, books, equipment, lab fees, student fees, sports fees, accommodation, and transportation.
As long as the payment can reasonably be associated with postsecondary education, there should be no problem. Students can even use the money to study abroad (Harvard, anyone?).
The main risk with RESPs is if the child does not go on to post-secondary studies and there is no one else who can be substituted as a beneficiary. In that case, you have a problem. The original capital can be withdrawn, because it was paid with after-tax dollars. But the earnings and the CESG are another matter. The CESG must be paid back to the government. As for the rest of the money, if you have RRSP room available, the money can be transferred there. Otherwise, it must be withdrawn.
You will be assessed tax on the withdrawal at your marginal rate plus a 20 per cent penalty unless you live in Quebec, in which case the penalty is 12 per cent. That means most of the earned income could end up in the government’s hands.
Finally, choose a simple, low-cost RESP. Don’t enter a plan that requires you to pay high fees, most of which go to sales commissions. Most financial institutions offer basic plans which will cost very little to maintain. My preference would be a mutual fund plan. Start with a low-risk balanced fund and build from there. Gordon Pape is editor and publisher of the Internet Wealth Builder newsletter. His website is www.BuildingWealth.ca