Student debt is driving more bankruptcies than it was seven years ago, according to a statistics compiled by Kitchener, Ont.-based bankruptcy trustee firm Hoyes, Michalos & Associates Inc., underscoring the importance of RESPs and education savings in general.
According to the firm, 15.1% of people filing a bankruptcy or consumer proposal carried student debt in 2017, up from 12.9% in 2011.
“Rising tuition costs are certainly contributing to a financial crisis for graduates,” Doug Hoyes, Licensed Insolvency Trustee, said in a statement. “The average student debt among those aged 18 to 29 filing insolvency increased by 20% over the past seven years.”
“Obviously the cost of education is going up,” says Mark Berry, a London, Ont.-based investment advisor with BMO Nesbitt Burns Inc. “Starting an RESP at the earliest possible opportunity provides the greatest opportunity to ensure that there’s money there for the student down the road.”
“A child born today has 216 months to go before their 18th birthday,” he says. “When you look at it that way, you understand how quickly time can pass. And by pushing it forward and not dealing with it sooner, it creates a bigger burden down the road.”
RESPs remain an attractive vehicle for education savings because clients are able to take advantage of the Canada Education Savings Grant, Berry says. “Starting a monthly contribution plan to an RESP of $208 can provide them with the maximum grant available through the CESG.” Secondly, RESP withdrawals are taxed in a student’s hands, likely at the lowest tax rate.
The heavy burden of student debt is a concern, said Berry, “especially as students are finishing up an undergraduate degree and are unable to secure a good job.” He counsels clients to talk to their university-aged children about budgeting and seeking alternative sources of funding, such as scholarship, bursaries, and grants.
Career planning, taking into consideration the return on investment of a student’s education, is important, too.
“I’ve seen a lot of kids that I would have thought would be destined for university are actually directing themselves to college programs, whether that’s electricians or plumbers or construction folks,” Berry said. “The cost is significantly less, to some extent, and most of them are staying at home … I think it’s a very valuable thing.”
“I think a lot of parents just sort of default to letting their kids do whatever, and that’s probably not the best advice. The best advice is probably to engage the student, and to help them understand what their options are.”