Back-to-school brings mixed feelings for young parents across the country. None are likely how much their child’s education will cost after they graduate high school. Embark, a not-for-profit education planning company, expects the current $75,000 cost of a four-year university degree and residence in Canada to grow by 39 per cent over the next 16 years. Even for locals, Statistics Canada puts the current average annual tuition for post-secondary school alone at nearly $8,000 or $32,000 for a four-year degree. For decades a good chunk of those costs could be offset through a registered education savings plan (RESP) but government assistance has withered as costs have soared. Since 2007, the lifetime contribution limit for the savings and investment plan has been capped at $50,000 and the lifetime grant limit is frozen at $7,200 per child. How an RESP can still help Regardless, the RESP remains one of the best ways to help finance a child’s education - especially for parents who start saving early. The plan matches annual contributions by 20 per cent up to $500, to a lifetime maximum of $7,200. To maximize the full government grant, parents need to contribute an average of $2,500 each year. Unlike registered retirement savings plans (RRSPs), which have decades to grow, RESPs only have up to an 18-year time horizon. That means the money in the plan needs to be invested for a shorter period of time, to be withdrawn over a shorter period of time. Since the funds need to be invested in the broader markets to grow, there are risks when investing in an RESP. The money can be invested in just about anything - stocks, bonds, guaranteed investment certificates (GICs), mutual funds, exchange traded funds - just like investments in a RRSP or tax free savings account (TFSA). There are investment products tailored to RESPs, which a qualified advisor should be able to recommend. Most financial institutions including banks, credit unions and mutual fund companies provide RESPs. Scholarship plan dealers - companies that only sell RESPs - offer individual, family and group plans. It’s important to shop around and compare fees. Like any investment vehicle, RESP fees expressed as a percentage of the amount invested eat directly into returns. How an RESP graduates The contributions and grants grow tax-free while in an RESP, but unlike an RRSP they can’t be deducted against a parent’s income. Instead, it is taxed when withdrawn in the hands of the low-income student who is typically taxed at a lower marginal rate. If a child decides not to continue after high school or if too much money is accumulated, the parent will have to pay tax on the money earned in the plan as interest. This money is called “accumulated income.” It will be taxed at the parent’s regular income tax level, plus an additional 20 per cent. At that point the money that the parent puts into the RESP is returned. The Canada Education Savings Grant can be shared with a brother or sister if they have grant room available – otherwise, the grant must be returned to the Government of Canada. The lifetime limit of $50,000 is available for each child. To get a better idea of how much an RESP needs to grow to keep pace with the rising cost of a post-secondary school education, Embark offers an online calculator on its website. Embark also offers estimates specific to individual universities and colleges in each province and territory.
