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With thousands of students returning to post-secondary education, the costs of a new school year may be daunting.
According to Statistics Canada, the median postsecondary student graduated with a whopping $17,500 in debt in 2015, and the costs have only climbed since then.
The good news is there are programs available to help offset the costs, namely the Registered Education Savings Plan (RESP), which can include up to $7,200 in grants for students to help them earn an education.
The program, despite its benefits, has little uptake. Lisa Hannam, executive editor of MoneySense and author of MoneySense’s Student Money Guide 2023, told BNNBloomberg.ca that data suggest just one in six families have an RESP account.
“Make sure that you're using the RESP because not everyone does,” she said in a telephone interview.
BNNBloomberg.ca spoke with experts Hannam and Christine Van Cauwenberghe, head of financial planning at IG Wealth Management, about the best ways students and parents can maximize the RESP.
CREATE AN ACCOUNT EARLY
For those with young children, the experts agreed that creating an account as early as possible is most beneficial, even if the parents can’t afford to contribute to it.
Lower-income parents may qualify for the Canada Learning Bond, which contributes $500 to the RESP for the first year of eligibility and $100 every year until age 15, regardless of any other contributions to the account.
Thus, if an RESP account is created at birth, the child will have $2,000 in government grants by age 15.
“There's no matching requirements for the Canada Learning Bond and that amount will accumulate if you don't open up an account right away, but you’re not going to get any interest on those amounts” said Van Cauwenberghe. “Even if you yourself can't afford to make any contributions, you want to open up an account as soon as possible to get the learning bond.”
For those with the means to contribute to the RESP, the Canada Education Savings Grant matches 20 per cent of contributions annually, up to $500, up to a lifetime limit of $7,200.
“That's a significant return on your money, even if you didn't make anything,” said Van Cauwenberghe. “Obviously, you want to make sure that you do earn some return. So it's important to speak to a financial planner and make sure the amounts are invested properly.”
Hannam said it’s in parents’ best interest to maximize their RESP contributions to get the most out of the grants.
“You want to make sure that you're getting that maximum amount to get that government money, because otherwise if you just use it and don't make that amount, then you're looking at money that you're not accessing,” she said. “It's almost like throwing money away.”
Hannam also suggests being more aggressive with contributions in the early years of a child’s life, primarily to take advantage of the compound interest.
“If you have a larger amount at the beginning, that compound interest will just grow on top of the interest like that,” she said.
POSTSECONDARY STUDENTS: TAKE OUT LARGER SUMS EARLY IN
Van Cauwenberghe suggests students should more aggressive with using RESP savings in the early years of college or university, instead of spreading it out evenly throughout the years of their program.
“Usually, in the first year or two, the students are earning relatively low income and the income payments that are paid to the student are taxable to the student, but if they're in a low-income tax bracket, and you're using the tuition tax credit, they usually pay a little to no tax,” Van Cauwenberghe.
Things could change in a student’s later years when a co-op program or paid internship could move them up a tax bracket.
Additionally, Van Cauwenberghe suggests using the money early is advantageous because plans can change, and money left in the account can face stiff taxes.
“In some cases, parents think that their children are going to take two degrees and so they want to spread it out over six to eight years, and I can see where there's some benefit to that,” she said. “But if you leave it too long, and then your child doesn't take a second degree, you are going to have a penalty.”
“It's not a great outcome if you leave large amounts of money in there,” she added.
TAKE OUT SOME MONEY BEFORE COLLEGE
Van Cauwenberghe said she always tells parents and students to start moving money out of the RESP and into a conservative savings account such as a TFSA before they enter college or university.
“It's not subject to as much volatility when their children are going to need the funds,” she said.
“Really think about whether or not the funds are properly invested and now that you're dealing with a much shorter time horizon, make sure that they're not in an overly aggressive portfolio.”