MoneySense Magazine, October 2009
Education: The $150,000 surprise
Should you pay for your kids’ education? Or should they?
This article was first published in the October 2009 issue of MoneySense.
My $150,000 surprise came two years ago. I was sitting on the living room couch with Laura, my daughter, who had just turned 16. She had decided it was time to start considering universities and she had brought home a stack of brochures full of pictures of grinning students and ivy-festooned buildings. I still recall the instant my eye fell on page 6 of Carleton University’s guide for prospective students. As I read the list of fees and other expenses, my jaw dropped. According to the brochure, a year of university for an out-of-town student, including tuition, books and living expenses, would cost $18,500. Total bill for a four-year bachelor’s degree? About $75,000.
The numbers levitated me off the couch. I’m sure many parents have faithfully tracked the rising cost of university since their kids were in a bassinet. I, however, had blissfully ignored the issue. My husband and I had paid for our post-secondary educations largely by ourselves, and we had always assumed that our kids would do more or less the same.
Fat chance, I now realized. Laura had done a bit of babysitting, but she still had to ask me for money to go to the movies. No way was she suddenly going to start gushing cash. And then I had Luca, her brother, coming up four years behind her, to consider as well. I realized with mounting horror that the total bill for putting Laura and Luca through university could easily hit $150,000.
My problem? After years of putting away dribs of money here and there for our kids’ education, my husband and I had accumulated a grand total of only $15,000.
I didn’t know whether to feel embarrassed at our lack of planning or outraged at the cost of education. When I talked to friends with teenagers over the next few days, I discovered that nearly all of them were as clueless as I was. After paying our mortgages and contributing to our RRSPs, most of us had managed to squirrel away only a few thousand dollars for our kids’ education funds. Our typical savings were a fraction of what it would cost to send a single child through university.
My biggest surprise was my husband’s reaction to the news. Carlo couldn’t see why we should pay for our kids’ education at all. He told me I was spoiling them. He had worked two jobs every summer through high school and college. He had paid his own way through school. He believed Laura and Luca should do the same.
Carlo told me we should immediately cut back on Laura’s dance lessons and soccer playing and encourage her to start looking for part-time work. Serving crullers a couple of nights a week at Tim Hortons or punching a cash register at the grocery store would teach Laura the value of a dollar and make her appreciate her education.
I didn’t know what to think. Carlo’s position seemed reasonable. Both he and I had managed to put ourselves through post-secondary education without much hassle. On the other hand, I couldn’t make the numbers work. How was Laura supposed to generate $75,000 or so over the next few years while going to school full time?
I decided to put the matter before the experts. First stop: Marc Lamontagne, a partner in Ryan Lamontagne Inc., a fee-for-service financial planner in Ottawa. I’ve always found Lamontagne to be a good source for financial wisdom that also makes emotional sense, so I explained my distress to him. As good parents, should Carlo and I be paying all of our kids’ educational expenses, paying none, or paying somewhere in the middle?
He told me it’s a question he gets asked a lot. “I see all three scenarios,” he told me. “There’s no wrong answer. But people have limited dollars so they really have to sit down and prioritize.” Lamontagne’s advice was to contribute what you comfortably can, but not to feel guilt-ridden if you can contribute only a fraction of the cost or even nothing at all. After all, it is your kids’ education, not yours. They should be prepared to finance the bulk of the cost — ideally through earnings, scholarships and the like, but also through student loans if need be.
It’s a tough-love approach that makes sense to my friend Lynn Braun, a single mom in Vancouver, B.C. Three years ago, after she separated from her husband, she was forced to look at her finances and decide between must-haves and nice-to-haves. “I had saved $25,000 for each of my two kids and I just decided that in the future I couldn’t afford to save any more,” says Braun, whose two kids are 13 and 10 years old. “Whether I have enough money to pay for all their university studies or not doesn’t matter to me. That’s all they’re getting.”
My problem is that Carlo and I don’t operate within such clear guidelines. We take vacations, we treat ourselves to dinner in nice restaurants, we enroll our kids in lessons and activities. When I looked at what Carlo and I spend in a year, I realized there were a few thousand dollars of wriggle room there. Perhaps we should call an immediate halt to all our little indulgences and pour every penny into saving for Laura and Luca’s university expenses. But would that turn our existence into an insufferably dreary ordeal? How much should we be willing to sacrifice for our kids? I didn’t relish the idea of going years without a vacation or a visit to a good restaurant. Spoiling our kids was one thing; spoiling our lives was another matter.
Just when I had gotten up my nerve to get tough and tell my kids that their education was their responsibility, I spoke to a couple I’ll call Eleanor and William Hudson. They have three kids ages 19 to 24 attending university in Toronto. The Hudsons were never able to save any money for their kids’ university education when their brood was growing up, but assumed that they would be in a position to help out when the time came for the children to go to school. Then William lost his job two years ago and money got tight. “As the kids were growing up, I really meant to start saving for their education but there was never any room for it in the budget,” says Eleanor, 52. “We’ve done our best to help pay for the kids’ housing costs but we’re letting them pay for the rest themselves. They have part-time jobs and they pitch in what they can, but I lie awake at night worrying about the debt they will graduate with. It’s a far cry from when I went to university. I worked a part-time job and was able to cover almost all of my expenses myself by working 20 hours a week. My kids will never be that lucky.”
Hearing the Hudsons’ pain proved to me that I didn’t want to wind up in the same position. Watching your kids take on a mountain of debt is wrenching enough if you have no choice in the matter. I couldn’t imagine putting our kids through that ordeal if Carlo and I were in a position to help out.
As I pondered the situation, I realized that if there was one big mistake that Carlo and I had made in our approach to our kids’ education, it was in ignoring the issue until Laura was on the verge of university. We had never discussed the matter, either between ourselves or with our kids. Laura had developed a firmly rooted expectation that her parents would pay for her education; Carlo and I had assumed that she and her brother would do most of the heavy lifting.
Avoiding this confusion is why JoAnne Anderson, a fee-for-service adviser with Raymond James in Mississauga, Ont., insists on reviewing her clients’ plans for their kids’ schooling every two years. She wants to make sure that the amount they’re putting away is sufficient to fund their ambitions.
Anderson stresses the importance of open and honest communication to her clients. If you expect your children to pay for most of their university education, you should explain that fact of life to them when they’re as young as seven, so that by the time they turn 15, they’re ready to work. “Open an honest dialogue with them,” says Anderson. “Ask them, ‘Where do you want to go for your post-secondary education?”
If you’ve decided that you will help your kids out financially, your best vehicle is a registered education savings plan (RESP). You can open an RESP at your bank or broker. For every dollar you contribute, up to $2,500 a year per child, the government gives you an immediate 20% top-up. (For more details on how to get the most out of your RESP, see below).
Anderson stresses that every situation is different. If your family is barely making it, an RESP may not be your best investment. Instead, it may make more sense to pay down your mortgage as quickly as possible, then take the funds that used to go into your mortgage and use them to help out with your kids’ tuition when the time comes. “Considering that you’re saving thousands of dollars in interest by paying your mortgage off faster, that strategy can work,” says Anderson. “If you can get your house paid off by the time your kids hit university, you’ll have lots more cash flow at that point.”
Whatever strategy you choose, get started now. Gregory and Catherine Drost began planning for their kids’ university costs 16 years ago, shortly after the first of their four kids was born. “Our goal has always been to give each of our kids $25,000 towards their costs,” says Drost, a district sales manager at Hyundai Canada in Dartmouth, N.S. “I’ve been saving a few thousand dollars a year since my oldest was three, and I’m close to meeting that goal. That’s all we can afford and I fully expect them to come up with the rest of the money themselves, whether it’s through part-time work, loans or scholarships.”
I admired the organized, methodical way that Drost had gone about instilling the right habits in his kids. “I started encouraging my kids’ savings habits years ago,” he says. “As soon as each one saved $20, I matched it and deposited that money into their savings account. I did the same thing when they saved $100 and $500. Believe me, they’re great savers now and very good with money.”
In my own case, it was too late to reshape my kids’ expectations. After several months of being tugged between my daughter’s calm insistence that of course Carlo and I would pay for university, and my husband’s constant refrain that we-put-ourselves-through-school-so-they-can-do-it-too, I decided to take a close, hard look at the numbers. I delved back into the past and looked at what I had actually paid and earned back when I was a student. The figures were eye-opening.
In the early to mid-1980s, when I was studying for a bachelor’s degree at the University of Toronto, I paid $1,000 a year in tuition. Add in the cost of books, and my school costs never topped $1,500. It seemed a large enough amount at the time, but it really wasn’t. If you adjust for inflation in the two-and-a-half decades since then, my tuition and books cost me the equivalent of about $3,100 in today’s dollars.
I lived at home and I never had a problem earning many times my school costs. From May through September, I worked a total of about 40 hours a week at three jobs: filing papers at an architect’s office, doing odd jobs at a magazine, and waitressing at a banquet hall three nights a week. All told, I earned $500 or so a week. By fall, I had typically earned at least $7,000. I had plenty of money to buy clothes, go out with friends, and put gas in my used car. Because I lived at home, I even had money left over for savings.
Compare that to the situation that faces Laura. Her tuition for a general arts and science program at my alma mater is $5,900. (That’s a relative bargain: if she were studying engineering, her bill would be close to $9,300.) Books add at least another $1,000 to the bill. (If you haven’t priced university texts for a while, get used to the idea of the $150 textbook.)
Many students can’t land summer jobs. According to Statistics Canada, the student unemployment rate this summer was nearly 21%. The bulk ofthe students who are lucky enough to find work wind up in stores, restaurants or other service jobs, making the minimum wage.
By my calculation, the most that Laura could make if she worked 40 hours a week at a minimum-wage job for the entire summer would be $6,000, or barely enough to cover her tuition. She would not have a penny left over for books, clothes, transportation or entertainment. She would not even be able to buy needed supplies, such as a computer or lab supplies. And that’s assuming she lived at home. If she wanted to go away to university in a different city, she would have to raise or borrow at least another $10,000 a year to cover living expenses.
When I showed Carlo my numbers, he relented. All right, he agreed, maybe times have changed. Perhaps our kids could use a financial boost. But we still had to be realistic.
So here’s the upshot: we caved. Or perhaps I should say that I caved. Laura just finished her first year of university this past May and I paid for it all. But what made the numbers work was a major concession on Laura’s part. Rather than going away to school, she agreed to go on living in her bedroom and attend the University of Toronto.
By staying at home and enduring her hopelessly uncool parents, she is shaving about $40,000 off the total bill for a bachelor’s degree. I figure her final tally will come in at around $35,000. That’s still a considerable burden, so she and I struck a deal. Laura has agreed to work during her summers throughout university and contribute $2,000 a year towards her university expenses.
It’s nowhere near enough to pay for most of her studies, but it’s a compromise that both Carlo and I can live with. And if Laura decides to apply to graduate school or law school in a few years? Carlo and I agree — she’ll be on her own.
MoneySense Magazine, October 2009