Despite the soaring cost of post-secondary education and the benefits of registered education savings plans, more than half of Canadians who are saving for the education of children or grandchildren are not contributing to RESPs, according to a recent survey by Winnipeg-based Investors Group Inc.

RESPs offer several advantages, including tax deferral on investment growth and income, and the ability to have gains taxed in the student’s hands upon withdrawal of the funds.
The juiciest incentive is the Canada education savings grant, a grant from the federal government paid directly into a beneficiary’s RESP that adds 20% to annual contributions. (Those annual contributions are restricted to a maximum of $2,000, up a lifetime maximum of $42,000). If the CESG is maximized at $400 a year, it adds up to $7,200 in free money.

“Most advisors are good at bringing RESPs to the attention of their clients, but [advisors] may not realize how many misconceptions exist about the product,” says Debbie
Ammeter, vice president of advanced financial planning at Investors Group in Winnipeg.
“Clients may be shying away from RESPs because they don’t understand the product, [so] there is an opportunity for advisors to explain the rules and advantages.”

For example, Investors Group’s poll found that, even among those already contributing to RESPs, more than 56% mistakenly believe they will lose the growth on their RESP savings if their child chooses not to pursue a post-secondary education. It is important that clients know what options are available, Ammeter says. If one child decides not to go to university, college, trade school or another qualifying post-secondary institution, the RESP can be switched to a sibling. Alternatively, parents can choose to repay any grants received along the way and roll the RESP contributions, as well as the investment growth, into their own RRSPs or spousal RRSPs if they have contribution room.

Tax-free withdrawals

If the RESP beneficiary chooses not to attend a post-secondary institution by age 21 and the plan has been in existence for more than 10 years, contributions can simply be withdrawn by the subscriber on a tax-free basis. Any grants received must be repaid. And any accumulated income on the investments in the plan would be taxable to the subscriber when withdrawn and subject to an additional 20% in taxes over and above the subscriber’s marginal rate.

Despite the incentives, almost half of Canadian parents haven’t saved enough money to send their children to university for even one year, let alone a four-year degree, the Investors Group poll found. According to Statistics Canada, the average cost of a year at school for a child who is not living at home is currently $12,000-$15,000, including tuition, books, supplies and living expenses. That means a four-year degree will cost up to $60,000.

By the time a child who is born today reaches university, these expenses could be significantly higher. Tuition fees in Canada have risen 185% in the past 15 years, or four times faster than the consumer price index. The poll found that, of those parents who had invested in RESPs, 45% had accumulated less than $10,000, while 66% had less than $20,000, which isn’t enough to put a child through the second year of university if he or she studies away from home.

“With costs escalating, the bill at the end of a child’s education can be high,” Ammeter says. “But there is also a price to pay if the child doesn’t acquire post-secondary skills, and that can boomerang on the entire family.”

The main reasons cited in the poll for not opening an RESP include: “There are better ways to save for education” (25%) and “I haven’t gotten around to it” (18%). Ammeter believes the government grant that’s available means there is no better way to save for a child’s education, and that parents should take advantage of the plan for at least a portion
of education savings.

“Post-secondary education is an important topic of discussion for parents to have with their children and their financial advisors,” Ammeter says. “It’s important for advisors to know what parents’ attitudes are and their ability to put money away, as well as whether they expect a child to contribute through part-time jobs and student loans.

“The need to save for children’s education and for the parent’s retirement will probably overlap, so it is important to set priorities,” she adds.

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Parents can also help by allowing their children to live at home while attending post-secondary institutions and covering their living costs, Ammeter says. The poll shows that children are now dependent on their parents for a longer time than in previous generations, because of the higher costs of education and a longer period of skill training or education required before starting a career. A post-graduate degree can mean even higher costs and more years of financial dependency. A much later average age for marriage is also contributing to the trend for adult children to stay in the nest.

According to Statistics Canada, more than 40% of adults in their 20s lived with their parents in 2001, a marked increase compared with 21% in 1981. In 2001, the percentage of males in their 20s who were still living the family home was an even higher 47%.
IE