Students need to balance their books

(August 11, 2004) So your clients are sending their kids off to school next month and they have followed your planning to the letter, saving up for the big day and the even bigger bills.

But are their children prepared for the real world? Are they about to ration their spending wisely, or will they blow through their education funds before Christmas?

One option may be to leave the cash in the hands of mom and dad, but putting junior on an allowance may just be delaying the inevitable — one day, he’ll have to be responsible for his own finances.

It might be worthwhile — think of it as another way to show your value — to discuss some of the money-saving strategies that will keep your client’s college-bound child stocked with enough macaroni and cheese to last the entire school year.

Those students who have had a job over the summer or after school might find the transition a lot easier having already learned the value of money and the effort required to budget it effectively.

“When they first start earning their money and they have some discretionary income, the parents should get them to look carefully at a budget,” says Myron Knodel, manager of tax and estate planning at Investors Group. “The budget should be something [the kids] develop themselves. If it’s something they do, there will be more of an incentive to stick to it, rather than if it’s given to them.”

Developing budgeting skills while living at home will help make the adjustment to independence easier. Knodel says it is important for the student to realize that financial prudence will be important if he is to stretch his limited income.

Student debt

“Getting a student loan is a good way of financing education, in that there is no interest charged on the loan throughout the time period that you are in school,” Knodel notes. “Interest rates are watched quite closely by the government so that they don’t get too high and it should be a source of financing that is looked at quite closely.”

Considering the interest holiday built into student loans, it might be wiser to take on a student loan —assuming the student qualifies — and keep investments in place to help pay off the loan during the interest-free grace period after graduation. It’s not often you have the chance to take advantage of a four-year, interest-free loan.

“Whenever you can get an interest-free loan, you can’t go wrong,” says Knodel. “Even if you have money in an RESP or money set aside, you would be earning some interest. The loan would be a better road to go, if you can still get the student loan.”

He also points out that the interest paid on a student loan is tax-deductible.

There are several other tax advantages available to students which they should be made aware of as well. They should be especially careful to keep track of their tuition receipts, since they represent a tax deduction which could help offset income from their RESP. Lab fees are also deductible, but the cost of books is not.

If tuition offers a larger deduction than the student needs for the year, they can carry it forward or it can be claimed by their parents if they have been supporting them through school, to a maximum of $800 per year. On top of the tuition deduction, the government offers an education credit, which can also be carried forward.

For students moving out to attend school, the cost of moving can be claimed, but Knodel says this can only be applied against scholarship income.

One aspect of going off to school that presents a major expense is housing. Is it more affordable to live in residence or off-campus? Occasionally the family will consider investing in real estate for the student to live in.

Knodel warns against this option, however. If a client is considering buying real estate in a different city, they will likely require a mortgage unless they are exceptionally wealthy to begin with.

The interest costs associated with the mortgage, on top of the closing costs and property taxes, will likely negate any benefits over renting and there is always the risk of being caught in a down market when the student graduates.

Renting may feel like a waste of money, but since the student should be focused on studying, the stress of home ownership and upkeep might become too much of a distraction.

The upside to home ownership is that because its the primary residence of the student, he can take the capital gains exemption when it is eventually sold.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(08/11/04)

Steven Lamb