Posted on Wednesday 10 December 2014
This article is part of our Finance Hub.
In 2013 and 2014, the average cost of one year’s tuition at a Canadian college was almost $6000. Students also face high and rising costs for textbooks, study materials, accommodation, and other living expenses. The cost of education is expected to rise every year for the foreseeable future, so it is more important than ever to make smart financial plans for your children’s post-secondary education. Luckily, there are tools that you can use to help them. This guide will give you some pointers.
Funding an Education
One of the most popular ways to build a post-secondary education fund in Canada is the Registered Education Savings Plan, or RESP. RESPs allow you to save money tax-free for the purposes of education. Most financial institutions offer RESPs, and they are a safe and practically foolproof way to build your fund. All you need is a social insurance number each for you and the child, and it can be opened as soon as they are born. Any given individual can be the beneficiary of up to $50,000 in RESP funds, enough to cover a few years of tuition, and this allowance can be spread across any number of RESPs. For example, a child’s parents and grandparents could each open a RESP for him, spreading the cost around. There is no annual limit to how much you can pay into a RESP, so it is a great place to put windfall income . You can contribute to a RESP up to 31 years after it is opened, and all funds must be used by its 35th year. If you want to invest more than $50,000 in a single person, you will need to find other investment products. Consider a Tax-Free Savings Account. There are three main types of RESP. A family plan allows you to save for several blood or adopted members of your family at once. Blood relatives are defined here as children, grandchildren, and siblings. Earnings on the plan can be shared, and government grants allocated as you wish. An individual plan is more flexible, in that it can be opened for any one person you want, even non-relatives. In fact, you could even open an individual RESP for yourself if you plan to return to school in the future. Finally, group plans work a little differently, and tend to have more rules attached. They pool money among a group of children, and tend to require regular fixed deposits from members. You should only invest in this type of plan if you are sure that your beneficiary will go to college, because otherwise, your money is probably lost. RESPs vary from institution to institution, so you should definitely shop around. Ask about any applicable fees for managing your investment or withdrawing money, and find out whether it requires regular fixed investments or an initial lump sum. You should also find out which post-secondary education options count in order for your RESP to pay out. Some financial institutions are stricter than others. Finally, learn what happens if you need to cancel your RESP. Not all beneficiaries will end up in post-secondary education, so find out what happens to your deposits.
The RESP can hold up to $50,000, but you don’t necessarily have to raise all of that money yourself. The Canadian government has programs designed to top up your post-secondary education fund. The most widely available of these is the Canada Education Savings Grant, or CESG, available up until the end of the calendar year in which the beneficiary turns 17. No matter how high your income, you qualify. You can apply to receive this by submitting a form through your RESP provider. Once approved, the grant pays 20 cents into the RESP for every dollar you contribute, up to a limit of $500 per year and $7200 lifetime. For families on lower incomes, the grant on the first $500 deposited each year is increased. For children born into lower income families after 2003, a Canada Learning Bond of up to $2000 is available. Unlike the CESG, you don’t need to make any RESP contributions in order to qualify, although you do need a RESP. This scheme pays out $100 per year for each year before the age of 15 that you receive National Child Benefit, plus a $500 lump sum at the start of the grant and an additional $25 towards the cost of opening a RESP. Some provinces also offer financial assistance. In particular, residents of Quebec and Alberta should find out what their provincial government can do for them.