A lesson in financial planning for post-secondary education
Parents with children going to post-secondary schools this fall might be suffering from a case of sticker shock. Costs are high, sometimes eye-wateringly so.
Students can expect to pay about $80,000 for an average four-year post-secondary education program, including tuition, books, board and lodging, and living expenses. It’s more than double that for professional degrees like law or medicine. The cost for a U.S. Ivy League school starts at a minimum US$60,000 for just one year. Costs, including rent, groceries, campus food, travelling home, books and course materials also rise annually as a result of inflation and other factors.
Where does the money come from?
Surprisingly, most funding does not come from Registered Education Savings Plans. According to the Maclean’s survey, about two thirds of post-secondary students do not have an RESP.
- 20% of students get most of their funding from parents or guardians.
- 20% of students get most of their funding from student loans.
- 12% of students get most of their funding from their own savings.
- 5% of students get most of their funding from scholarships and bursaries.
These are pretty low numbers. Most students get funding from a mixture of these sources, and end up struggling by on a shoestring (which, arguably, has always been a description of student life). But it doesn’t really have to be so bad if you budget properly.
Managing on a limited budget
* First, apply for every available bursary, scholarship, or grant that you can find related to your area of study. Consult with your high school guidance counsellors or your prospective university or college. There are many grants and bursaries available that go unawarded simply because no one applies for them, but you’ll have to do your research.
* Economize on books and study materials by buying used textbooks, electronic versions, sharing with roommates or classmates, borrow from the school library, or use older editions if possible.
* Live in a shared residence if on campus or live with roommates off campus to share costs like utilities and Internet connections.
* Budget for the cost of meals. If living in residence during the first year of university, check on the various meal plans available. These are often offered for off-campus students as well. If you’re taking responsibility for your own meals, shop wisely, look for discounts, and cut eating out (and the accompanying alcohol intake) to a minimum – that’s a real cash vampire.
* Transportation can be a big expense, especially if you have a car. In addition to gas, maintenance, and insurance, you’ll likely also have to pay for parking, possibly both on and off campus. Seriously consider public transit for getting around. These savings can really mount up.
Start RESP withdrawals
If parents had the foresight to open a Registered Education Savings Plan when their children were very young, they might well have a tidy little education fund built up. Students can begin receiving payments (called Educational Assistance Payments, or EAPs) towards tuition from the RESP as soon as they are enrolled in a qualified post-secondary educational program, including colleges and universities, apprenticeship programs offered by trade schools, and CEGEP in Quebec. For Canadian residents, the payments consist of funds contributed to the RESP and earnings on those funds, the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) for eligible students, and any provincial savings programs the student may be eligible for.
A university or college outside Canada qualifies as a post-secondary institution eligible for EAPs, provided the student has been enrolled full-time in a course of not less than three consecutive weeks and remains a resident of Canada.
But in order to receive the Canada Education Savings Grant or Canada Learning Bond as part of the EAP, a student beneficiary must be a “resident” of Canada. Residency requirements may also apply for provincial grants and incentives. So what qualifies as “residency”? Even if you are a Canadian citizen, the Canada Revenue Agency stipulates that you are a non-resident for tax purposes if you normally live in another country and are not considered a resident of Canada. You are also considered non-resident if you do not have significant residential ties in Canada and you live outside Canada throughout the tax year or you stay in Canada for less than 183 days in the tax year. This will be important for parents or grandparents whose Canadian-citizen children live abroad.
If your child does not go on to post-secondary education
Your child may not want to go immediately on to post-secondary school, or may choose a different path altogether. So what happens to that hefty sum that’s accumulated in the RESP? Fortunately, there are many options available for RESP funds that are not immediately put to use for tuition.
* Keep the plan open. The rules say that RESPs can be left open for up to 36 years before the funds must be deployed. So there’s plenty of time for your child to decide what they want to do after high school. There’s no pressure and no rush. Funds in the RESP will continue to grow. If you haven’t contributed the maximum, consider topping up the plan during this period if your child simply wants to take a gap year but is still planning to go on to university later.
* Use funds for other programs. Remember that RESPs can be used for apprenticeship programs, as well as eligible trade and business schools. Likewise, RESP funds may be used for qualifying part-time education programs.
* Transfer beneficiary. If the beneficiary of the RESP decides not to go ahead with post-secondary at all, the RESP may be transferred to another beneficiary – a sibling, for example. It’s important to check with the plan sponsor to learn more about how this can be done.
* Shutting down the RESP. If you are certain your child will not be attending post-secondary education, and there are no other beneficiaries available, you may terminate the RESP and have your original contributions returned to you tax free. Note, however, that you will pay tax on the income generated by those contributions (called Accumulated Income Payment, or AIP) at your top marginal rate plus an additional penalty of 20% (12% in Quebec). There is no capital gains tax on investment growth in an RESP. Any government top-up grant money through the Canada Education Savings Grant and the Canada Learning Bond received by plan must be returned to the government.
* Transfer to RRSP. To defer tax on the AIP and avoid the 20% penalty on terminating an RESP, you may be able to transfer up to $50,000 of AIP to your or your spouse’s RRSP, provided you have contribution room available and the RRSP allows this type of transfer. You would have to include the amounts transferred in your income and deduct the same amounts as contributions to your RRSP, making the AIP transfers a wash as far as any deduction for RRSP contributions go. You can only make this manoeuvre if the RESP has been open for at least 10 years, your child is 21 or older and has decided not to go on to post-secondary, and you are a Canadian resident.
Transferring investments in kind (as is) from an RESP to an RRSP may be a way of avoiding transaction costs. It saves you having to sell in one account and buy in another, incurring transaction costs like commissions to do so. Although the Income Tax Act permits in-kind transfers, practically speaking, not all financial institutions may permit you to do so as an administrative practice. Check with both your advisor and your financial institutions, as there may be ways to get around this, because it is not a statutory rule.
The original contributions are yours to do with as you please, and may present a good opportunity to top up your, your spouse’s, or your child’s RRSP contribution room – and get the deduction. You might also consider topping up TFSAs in the same way.