Grappling with the growing cost of education

The average four-year program currently costs up to $66,000, including tuition, accommodations, transportation and student fees. Over the next 15 years, that number is projected to jump to $117,000, according to the government of Canada’s CanLearn Education Cost Calculator.

As the price tag grows, advisors should urge their clients to start the planning process as early as possible, says Sara Kinnear, director of tax and estate planning at Investors Group Inc. in Winnipeg.

“The earlier clients start to plan, the greater the chance that plan will succeed,” she says.

Advisors can help clients forecast the amount of money the child will need in order to determine which type of plan will work best for them, says James Rogers, financial advisor with Toronto-based Macquarie Private Wealth in Vancouver. Rogers’ $120-million book of business includes more than $2 million in registered education savings plans (RESPs).

“Clients should keep the planning simple, ” he says. “There are so many unknowns when a child is born. You don’t know what course they are going to major in or what school they are going to attend so just getting them to open an account should be the first step.”

The most popular investment vehicle for education savings is the RESP, a savings strategy established by the federal government that allows money to appreciate tax-free until the beneficiary (child) is ready to attend an eligible post-secondary school. The government will also add “free cash” to a client’s savings on an annual basis in the form of the Canada Education Savings Grant (CESG) and for some families, the Canada Learning Bond (CLB).

“The main advantage to clients with these accounts is that there is free money on the table, and the only way to get those dollars is to start saving in a RESP,” says Kinnear.

Although many new parents may have heard of these accounts, only half of Canadian parents with children under 18 have contributed to an RESP for their child, according to a survey conducted by the Bank of Montreal in 2010. New parents may be neglecting this opportunity because of a lack of time to set one up, or they may have the misconception that if their child doesn’t attend post-secondary school, their money will be lost.

“The challenge is in the parents’ hands to get all the paperwork completed in order to open the RESP and that can get lost in the shuffle for new parents,” says Rogers. “There is a hurdle for the client to become serious about setting it up early.”

To help clients get started, advisors should inform them of the different RESP options available to them.

Individual plans:
These accounts are set up for one beneficiary who does not have to be related to the subscriber (the individual setting up the plan). The beneficiary can be any age when named.

Family plans:
These accounts can be set up for one or more beneficiaries who are related to the subscriber by blood or adoption. If one beneficiary does not go to a post-secondary institution, another beneficiary can still use the funds in the account. Beneficiaries must be under the age of 21 when named.

In both individual and family plans, clients can decide when and how much to contribute, up to the lifetime limit. In addition, clients are responsible for managing the investments in the plan.

Pooled plans or scholarship trusts:
These accounts, offered through scholarship trust companies, can be set up as individual, family or group plans. In the group plan, the funds from multiple subscribers are pooled in investments that earn a fixed rate of return, and then equally shared among the beneficiaries of the plan if they attend an eligible post-secondary institution.

Clients in group plans are required to make set contributions, whereas in individual or family plans, clients decide when and how much to contribute. All plans are actively managed by the scholarship trust company.

This is part one of a three-part series on education planning. Tomorrow: A more in-depth look at RESPs and government grants.