RESP promoters pleased with budget’s education incentives

(March 24, 2004) Canada’s RESP providers are welcoming Ottawa’s efforts to encourage low-income families to put aside funds for their children’s post-secondary education.

In Tuesday’s budget, the federal government announcement the creation of a new Canada Learning Bond and said it would increase the Canada Education Savings Grant (CESG) for low- and middle-income RESP savers.

“We’re thrilled, we think this is a tremendous initiative,” says Peter Lewis, vice-president of the Canadian Scholarship Trust Foundation.

“Our mission is to make post-secondary education more affordable for all Canadians, so we’re pleased,” says Brian Munholland, president of USC Education Savings Plans.

“I think most of the financial services industry views the RESP as a loss leader, something they do for existing clients,” adds Munholland. “I’m not sure this will make a big difference for the banks and mutual fund companies but it will make a huge difference for us.”

Under the learning bond program — for families with annual incomes under $35,000 — Ottawa will provide an initial $500 for every newborn child, adding an additional $100 a year for up to 15 years. Assuming a 3.5% rate of return, the bond could accumulate as much as $3,000 by the time the child turns 18, Ottawa says.

Although $3,000 isn’t nearly enough to send a child to college or university, Munholland believes Ottawa is sending the right message by also encouraging parents to save on their own to make up the difference.

“They’re saying if you just add another $4 or $5 a week, you could have enough for tuition at a community college by the time your child is 18,” he explains. “Those numbers start to make it more workable for a lot of Canadians. The sooner we can get Canadians to recognize the value of saving early, the better off we are.”

Details have yet to be worked out, but Lewis understands the learning bond will be paid into an RESP. Ottawa says it will consult with the RESP industry to develop the program. The first payments likely won’t be made until at least 2005.

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Ottawa also announced an enhancement to the CESG, raising it to 40% from 20% on the first $500 of annual contributions for low-income families, and to 30% for middle-income families.

RESP promoters have been lobbying for just such a change, says Lewis, and are pleased the government is following through on the suggestion.

“We hadn’t specifically proposed the means test associated with the grant, but conceptually we think it’s a great idea to try to ensure that the people who need the CESG program are getting the most benefit,” Lewis says, conceding that the grant has been criticized in the past because it’s mostly been used by higher income Canadians.

“The reality is that families in the low-income range may have a more difficult time coming up with those funds. By increasing the incentive, it makes it that much more attractive, even if it’s just a little bit every week,” he says.

For advisors, the changes likely won’t have much of an impact, Lewis and Munholland say, since most don’t spend a lot of time working in low-income communities. But there could be an impact for some middle-income clients, and at the very least, advisors should keep on top of the RESP amendments, says Lewis.

“Clearly, any advisor who sells an RESP product will have to be aware of these changes because it will have implications, not only for people who have a plan today, but also if financial circumstances change tomorrow.”

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Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(03/24/04)

Doug Watt