Gone are the days when a couple thousand dollars from a grandparent covered post-secondary tuition and a summer job could cover remaining living expenses each year. Parents of children today need to do some serious saving and investing to cover just tuition for a four year degree. And clearly it’s not easy to do.
According to the Canadian Federation of Students, the average debt load of a graduating student is currently $27,000 and growing each year. Parents struggle with competing objectives for their hard-earned dollars, and school related costs continue to increase faster than average take home income. What to do?
Time is your friend
Starting early is core to a good investing strategy – whether you’re saving for post-secondary education, or your early retirement. Assuming the use of a Registered Education Savings Plan (a registered tax-advantaged plan), parents would have to save $191/month to accumulate $80,000 in 18 years (@ 5% return) vs. $441/month if they delayed saving and only had 10 years to accumulate the same $80,000. These figures include the 20% Canada Education Savings Grant that are added to contributors’ RESP deposits until each child turns 17 (to a maximum of $500 per child per year to a lifetime maximum of $7200).
Take advantage of the Family RESP
When it comes to the RESP try to avoid the pooled plans offered by companies that are dedicated to RESPs. Aggressive sales tactics, complicated terms, high up-front fees, and various restrictions on accessing your funds have resulted in many disappointed investors – and lawsuits – over the years. Better to just get an Individual RESP or Family RESP at a bank or credit union where you likely won’t pay any fees, and you have the flexibility to increase or decrease contributions as circumstances may require. You’ll also have complete flexibility regarding how your money is invested.
If you have more than one child, it’s generally a lot easier to manage the funds using a Family RESP – contributions still need to be allocated to a specific beneficiary for tracking purposes but it’s a lot less paperwork than managing multiple individual plans.
Once your child is attending a qualifying institution the investment growth potion of the RESP withdrawals will be taxed in the child’s name, and any contributed dollars withdrawn won’t be taxed at all (remember it was after-tax capital that was contributed in the first place). This often results in $0 tax payable for withdrawals from your RESP.
Be careful how to invest
Asset allocation is the term used to describe the percentage you hold in stocks, fixed income and cash – and it’s likely the most important driver of annual investment returns. Go too aggressive and you risk losing capital; invest too conservatively and you may not exceed inflation. The key here is to adjust your asset allocation as your child approaches 18. You don’t want to cash out investments when they’re down – but in a downturn you may be in that situation with any equity (or stock) holdings. So moving towards more conservative investments as your child moves through high school is simply prudent.
There is lots to learn about when it comes to funding a child’s post-secondary education. I’ll describe more about the RESP and other savings alternatives next time.