Parents dread tuition costs, but few have RESPs

(September 5, 2003) Canadian parents are not saving enough for their children’s post-secondary education, according to an Ipsos-Reid poll conducted for Scotiabank, with 65% saying tuition increases are making a university education impossible.

“The cost of post-secondary education and how to finance it is a concern for the majority of Canadian parents,” said Ron Laursen, senior vice-president of day-to-day banking for Scotiabank. “Parents and students understand that more jobs over the next few years will require skilled workers and a post-secondary education is important in that environment.”

But the poll says only 40% of parents have started an RESP, which would provide a tax-deferred savings plan for educational expenses.

“The big benefit is that the person investing the money doesn’t pay the tax at the end,” says Stan Shoolman of Children’s Education Trust in Toronto. “The growth of the funds is passed on to the beneficiary, and since that beneficiary is a student and students aren’t usually earning that much money, it’s a big benefit to make the nominee taxable at that point in time for the growth.”

The survey reveals a portrait of the average family with an RESP plan. On average the plans were opened when the child was three and a half years old, with contributions being made for the past 6 years. The average plan holds just $15,000.

Considering the estimate of a university education is $50,000, even parents with a plan must save an additional $35,000 over the next eight or nine years.

“I think they tend to forget that they have this opportunity to increase the plan,” says Shoolman. “The fact that they’ve started the plan, in their minds, they’ve covered the cost of the child’s education.”

“Those parents who have not yet started investing for education may be missing out on the benefit of starting early to save for education and the 20% government grant,” said Laursen. “When you add the government’s Canada Education Savings Grant to the individual contributions, these funds can significantly offset the rising costs of post-secondary education.”

The survey showed that 40% of parents have not even heard of the government grant program, which will match parents’ contributions by 20% to a maximum of $400 per year, with a lifetime limit of $7,200 per child.

If the parent has not been taking advantage of this grant they can still play catch-up.

Similar to the way unused RRSP contributions accumulate and can be made at a later date, a parent can make back-payments to their RESP, and the government will add the corresponding grant amount, back to the start of the grant program in 1998, providing the child was alive in that year.

For example, if parents opened an RESP in 2000 for a child born in 1997, they can contribute for every year from the child’s birth and qualify for the 20% grant on the first $2,000 of each year’s catch-up contribution.

If the child decides not to go to school, the grant is repaid to the government but any returns realized on the investment stay in the hands of the plan holder. A plan can either be transferred to another child, or rolled over into the parent’s RRSP, providing they have enough unused contribution space.

Shoolman says it is important to review the plan every year to see how it is progressing. Without periodic evaluation, the plan holder might not be aware of what percentage of the cost of education they have covered.

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Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(09/05/03)

Steven Lamb