Grad expectations: saving for your child’s education

Ignore the ads that urge you to save $60,000 to send your child to university. You can do it for $20 a week.

63

by

From the magazine.

63

I hope my daughter doesn’t get into Harvard. The cost would kill me. Even a four-year degree at a Canadian university — if I’m to believe the projections — will cost more than $60,000 by the time my two-year-old is ready to enroll. When I first looked at the numbers, I figured I had better forget about vacations and restaurants for the next 16 years and shunt every penny into my little girl’s education savings plan.

At least, that’s what I thought until I looked closely at the figures and talked to financial experts. What I learned will be a relief to every parent. First, you don’t need to save as much as you think. And second, if you do it right, saving that money won’t cramp your family’s lifestyle. Here’s how.

Set a realistic goal

According to the 2004 — 2005 Guide to University Costs in Canada, compiled by USC Education Savings Plans, the cost of a four-year program for a child born in 2004 will be $66,816 if you live within commuting distance of the college or university. It will be $134,987 if you have to pay for room and board on top of tuition and books. For parents with two or more children, those estimates are positively panic-inducing. But read the fine print and you’ll see they include “incidental expenses” such as local travel, entertainment and cable. Should you really be worried about saving for these items? Probably not.

For a more realistic estimate, let’s start with $4,400, about the national average annual tuition fee last year. Assuming tuition grows at the same rate as inflation, you can expect to pay around $6,500 a year when your child starts university in 2023. Over the course of a four-year program, the total tuition would be about $27,000. Include textbooks and equipment and the all-in cost is about $35,000 over four years.

You can save that by putting away just $20 a week. (I’ll explain how later.) But before we get into the calculations, let me assuage your guilt complex. As parents, we want to help our kids get the best possible start. But that doesn’t mean we have to shell out for every three ring binder they will ever need until they finish a master’s degree. You can teach your children an important lesson by putting some of the responsibility on them. “Kids learn a lot by having to work part-time through school,” says Sandra Foster, a financial educator and the head of Headspring Consulting Inc. in Toronto. “So before you think about how much you’re going to need to put away, think about what would really be in your child’s best interest.”

Patricia Lovett-Reid, senior vice-president of TD Waterhouse and the mother of four, agrees. “We sat down with each of our children and said, ‘We will fund to this amount, but we expect each of you to put in $2,000 a year,’ because I think that’s a reasonable amount they could save. We really thought there should be an incentive and a commitment on their part financially.”

Here’s how the numbers work in my case. Based on my $35,000 estimate for four years of tuition, books and supplies, minus $3,000 a year in summer job revenue that I expect my daughter to kick in ($2,000 a year in today’s dollars, adjusted for inflation), my goal is to save $23,000 by the time she turns 18. By then, my husband and I expect to have retired our mortgage, freeing up $1,000 a month for unexpected expenses, such as room and board if she chooses to attend a university out of town.

Pick a savings plan

Once you’ve decided on a realistic savings goal, you need to choose an investment plan that does three things. First, because your investment horizon is fairly short — a maximum of 18 years — your plan should protect your principal against a market downturn. Second, your plan should produce decent growth and compound your savings. Finally, unless you’re an investing expert, you probably want a low-maintenance program that won’t require you to make constant investing decisions.

Do it yourself

For most people, a self-directed Registered Education Savings Plan (RESP) fits the bill perfectly. You can set up one of these plans through your bank at no charge (although there may be a small annual maintenance fee of $50 or so) and it works like a self-directed retirement savings plan. You can make lump-sum contributions or arrange for monthly debits from a bank account and you can place those contributions in GICs, mutual funds, treasury bills, even stocks and bonds. There are no foreign content limits on your investments. And although your contributions are not tax deductible, the money in an RESP grows 100% tax-free until your child needs it to fund her education — and at that point it’s taxed at her rate, not yours. Since her income will likely be low, she will probably be able to combine her basic personal exemption (currently $8,012) and tuition tax credits to offset any taxes owing on her withdrawals.

Best of all, even if your stock picks perform dismally or bond rates are in the basement, you’re guaranteed a 20% return on the first $2,000 of what you contribute every year for every child, courtesy of the federal government’s Canada Education Savings Grant (CESG). Put in $1,000 a year and you pick up a free $200; put in $2,000 and you’ll get the maximum $400 grant. This grant money grows with the rest of your savings and compounds for even bigger returns. Factoring in the CESG and assuming average annual returns of 5%, I need to save only $16 a week, starting when my child is an infant, to hit my $23,000 goal by the time my daughter turns 18. If I want to build in a cushion, I can raise my contribution to $20 a week. Based on the same assumptions as above, that should compound into the full $35,000 cost of tuition and books by the time my daughter hits 18.

The one drawback to a self-directed RESP is that you have to make investing decisions for your child, which can be stress-inducing if you’re a novice when it comes to stocks and bonds. A simple and smart choice is to put your child’s money into a good, low-cost balanced mutual fund. (See Suzane Abboud’s Best Mutual Funds 2005 for some good candidates.) A balanced fund holds both stocks and bonds and provides a way to give your child a diversified portfolio in one easy swoop. If, for whatever reason, you don’t feel comfortable with a balanced fund, you can have a financial adviser oversee an RESP on your behalf; just remember that his fees will cut into your returns.

Playing pool

Once upon a time, the only RESP option was a socalled scholarship trust, a pooled investment that parents buy into by purchasing units in the trust. The two largest of these, Canadian Scholarship Trust Plan (CST) and USC Family Education Savings Plans, have been around since the 1960s. These firms manage your funds and guarantee your principal by sticking to safe investments such as government bonds and GICs.

Canadians have more than $5 billion in scholarship trusts, but the plans are plummeting in popularity now that most financial institutions offer self-directed RESPs that are more flexible and more transparent. Last summer, scholarship trusts came under scathing criticism from the Ontario Securities Commission, which lambasted them for luring customers with questionable marketing tactics, hidden fees and downplayed risks.

You should take the trusts’ marketing hype with a huge grain of salt. Many claim to achieve above-average returns. Many also promise to top up their payouts with the forfeited earnings of people who drop out, or whose kids don’t go on to post-secondary education. In 2002 — before the Ontario Securities Commission report — CST was claiming an 11.04% return for members whose children completed post-secondary studies that year. However, when MoneySense contacted its head office to get more details, we found the savings plan that earned 11.04% was no longer sold and that the 11.04% figure doesn’t take management fees into account. Details about those fees, which can be extremely high, are buried in the fine print of CST’s eye-blurring 68-page prospectus.

A major concern about many scholarship plans is their limited flexibility. While most will allow you to adjust your monthly or yearly contribution to reflect your financial situation, they also penalize or even disqualify you for missing payments. So if you have one or two months when your cash flow unexpectedly dries up, your entire RESP could be in jeopardy. Stringent rules can also be a problem when it comes time for your child to collect. Most plans mete out payments once a year for four years. That’s not ideal if your child’s financial needs fluctuate from year to year of study, or if she goes to university for more than four years. In contrast, a self-directed RESP lets you make withdrawals anytime you see fit and the plan doesn’t have to be closed until the end of the 25th year after you opened it, which should give your child plenty of time to earn a master’s degree.

Self-directed RESPs are nearly always a better way to save for kids’ schooling than scholarship trusts, but if you’ve already signed up for a scholarship trust, you don’t have to panic and cash out. The Ontario Securities Commission was clear that the problems with these plans relates to the way they are sold, not their accounting practices.

Trust us

An informal trust used to be one of the most popular ways for parents to put aside money for post-secondary education, and some people still swear by this method. Start-up is as simple as making an appointment with your bank or financial adviser to open a savings or brokerage account in trust for your child. To make it official, you must name a beneficiary (your child, of course) and a trustee (your spouse or any adult who is not the donor).

A trust fund’s main appeal is that it can be used for anything that is related to your child, not just his or her education. You can treat it as an emergency fund — if you’re laid off, you can tap the fund to cover the cost of food, clothing and other child-rearing expenses. In contrast, if you were to withdraw money early from an RESP, you may pay a stinging 20% penalty and lose any government grant money.

There are drawbacks to a trust, however. The biggest is that you miss out on the 20% government grant, or CESG. Maintaining a trust is also more work than an RESP. Because the income that grows within the trust is not tax-sheltered, you may have to file a tax return in your child’s name to report the income. Capital gains are not likely to be a problem — they’re taxed at your child’s rate, so unless she’s earning huge sums, she probably won’t have to pay any tax. But dividends and interest may be taxed in your hands.

Most frightening of all, when your child reaches the age of majority — 18 in most provinces — the trust is hers. So if she decides to blow it on a sports car or a trip to Rome instead of law school, you have absolutely no say in the matter. (If you want to stipulate that the funds can only be used for education, you have to open a formal trust, which means hiring a lawyer and paying legal fees.)

My advice is that unless the freedom to access your money at any time is worth more to you than a guaranteed 20% return, stick with an RESP for at least the first $2,000 a year of education savings. Then, since you won’t receive any CESG money for contributions above $2,000 a year, you might start an informal trust with any educational savings left over. This half-and-half approach gives you the best of both approaches: a trust’s flexibility along with free money in your RESP.

“To me the RESP is a no-brainer,” says Heather Clarke of Investors Group in Winnipeg. “A guaranteed 20% return — you probably need to go back to school yourself if you don’t realize that’s a great deal.”

63 comments on “Grad expectations: saving for your child’s education

  1. Wonderful beat ! I wish to apprentice while you amend your web site, how could i subscribe for a blog web site? The account aided me a acceptable deal. I had been tiny bit acquainted of this your broadcast offered bright clear idea

    Reply

  2. Thankyou for this post, I am a big fan of this internet site would like to keep updated.

    Reply

  3. I was aware of this already, nevertheless there was clearly several useful bits which concluded the image to me, regards!

    Reply

  4. love the life in London.It contours a beautiful outline to embed a tiny loop into a layered ,I do not normally do that, but I hope that we will have a mutual hyperlink exchange?2

    Reply

  5. Hey there outstanding blog! Does running a blog such as this take a lot of work? I’ve no expertise in computer programming however I was hoping to start my own blog in the near future. Anyway, should you have any ideas or tips for new blog owners please share. I understand this is off topic however I simply wanted to ask. Thanks!

    Reply

  6. I simply want to mention I’m beginner to weblog and absolutely enjoyed this web site. Very likely I’m planning to bookmark your website . You absolutely have amazing writings. Bless you for sharing with us your website.

    Reply

  7. I just want to tell you that I’m all new to blogging and site-building and definitely loved you’re web page. Most likely I’m going to bookmark your blog . You really come with fantastic well written articles. Cheers for revealing your blog.

    Reply

  8. Right, it really is a nice beginning but i’m going to look into that a little bit more. Will show you just what else there is.

    Reply

  9. I’m writing to let you know of the cool experience my cousin’s daughter went through visiting yuor web blog. She discovered numerous pieces, most notably what it’s like to have an excellent coaching mindset to get others quite simply have an understanding of various extremely tough things. You truly surpassed my expected results. Many thanks for offering the insightful, healthy, informative and even easy guidance on your topic to Jane.

    Reply

  10. Hm, So i’m comfortable with this but nevertheless not utterly confident, hence i am about to research a bit more.

    Reply

  11. I just want to tell you that I am very new to blogging and absolutely enjoyed your web-site. Likely I’m going to bookmark your website . You amazingly come with superb writings. With thanks for sharing with us your blog.

    Reply

  12. I’m aware of this previously, but nonetheless there was clearly some helpful pieces that completed the picture to me, appreciate it!

    Reply

  13. It’s actually a great and helpful piece of information. I’m glad that you shared this helpful info with us. Please keep us informed like this. Thanks for sharing.

    Reply

  14. Wow! Thank you! I continually wanted to write on my site something like that. Can I take a portion of your post to my site?

    Reply

  15. I simply want to say I am newbie to blogging and site-building and honestly liked your website. More than likely I’m going to bookmark your blog . You absolutely come with exceptional article content. Bless you for sharing with us your web page.

    Reply

  16. I like the valuable information you provide in your articles. I’ll bookmark your blog and check again here frequently. I am quite sure I’ll learn many new stuff right here! Best of luck for the next!

    Reply

  17. Hm, I’m just happy with this nevertheless not utterly positive, so i’m going to research a touch more.

    Reply

  18. I’m aware of this already, nevertheless there have been some helpful bits that completed the image for me personally, thank you!

    Reply

  19. That sounds wonderful yet i am still not too sure that I prefer it. Anyway will look further into it and choose personally! :)

    Reply

  20. Well, it is great, but how about the other options we’ve got here? Do you mind making one more post regarding all of them too? Many thanks!

    Reply

  21. I enjoy you because of your entire work on this website. Kate really loves managing internet research and it is obvious why. A lot of people learn all relating to the dynamic way you provide efficient items through your website and even inspire contribution from others about this content then our favorite girl is in fact learning a great deal. Enjoy the rest of the year. You have been performing a glorious job.

    Reply

  22. Also as, in order to help make our early days reminiscences seem hip and occurring, hoola-hoops are actually hula hoops, according to spell-checker Thanks Online Website Builder

    Reply

  23. Hm, I’m comfortable with this but nonetheless not utterly confident, so i am going to research a little bit more.

    Reply

  24. Thank you a lot for giving everyone remarkably breathtaking opportunity to discover important secrets from this site. It is often so excellent plus stuffed with amusement for me personally and my office peers to search the blog more than three times weekly to read through the latest things you have got. And lastly, I’m also at all times satisfied concerning the breathtaking knowledge you give. Certain 1 facts in this posting are particularly the best we have all had.

    Reply

  25. With the whole thing that seems to be developing throughout this particular area, all your viewpoints are generally quite refreshing. Nonetheless, I am sorry, but I do not subscribe to your whole idea, all be it stimulating none the less. It seems to me that your remarks are actually not totally validated and in fact you are yourself not really thoroughly certain of your argument. In any case I did enjoy looking at it.

    Reply

  26. I do enjoy the way you have presented this problem plus it does indeed offer me personally a lot of fodder for thought. Nonetheless, coming from everything that I have observed, I just hope when other comments pile on that men and women continue to be on point and don’t start on a soap box associated with the news du jour. Yet, thank you for this outstanding piece and whilst I can not necessarily go along with it in totality, I regard your point of view.

    Reply

  27. My brother recommended I might like this web site. He was totally right. This post truly made my day. You cann’t imagine simply how much time I had spent for this information! Thanks!

    Reply

  28. You made some respectable factors there. I seemed on the internet for the issue and found most individuals will associate with along with your website.

    Reply

  29. Along with every thing that appears to be developing inside this particular area, your viewpoints tend to be somewhat exciting. Nonetheless, I appologize, but I can not give credence to your whole suggestion, all be it stimulating none the less. It looks to everyone that your opinions are actually not totally justified and in reality you are yourself not fully convinced of your point. In any event I did enjoy examining it.

    Reply

  30. The heart of your writing while appearing agreeable at first, did not really sit properly with me after some time. Someplace throughout the sentences you managed to make me a believer unfortunately only for a very short while. I nevertheless have got a problem with your jumps in logic and you might do nicely to fill in those gaps. In the event you actually can accomplish that, I will definitely be impressed.

    Reply

  31. I’m still learning from you, as I’m trying to achieve my goals. I absolutely liked reading everything that is posted on your site.Keep the tips coming. I loved it!

    Reply

  32. This is such a superb learning resource that you are providing and you provide it away for free. I love visiting sites that comprehend the value of providing a top quality resource for free of charge.

    Reply

  33. I cling on to listening to the reports talk about getting boundless online grant applications so I have been looking around for the best site to get one. Could you tell me please, where could i find some?

    Reply

  34. Since fitting for some time for just a proper read in regards to this kinda niche .

    Reply

  35. hi. I observe that you’re most likely interested in creating back links and stuff. I’m merchandising scrapebox auto approve lists. If you’d like to trade ?

    Reply

  36. Thanks for the strategies presented. One thing I also believe is credit cards supplying a 0% apr often entice consumers along with zero rate, instant endorsement and easy over-the-internet balance transfers, but beware of the number one factor that can void your 0% easy streets annual percentage rate plus throw anybody out into the very poor house fast.

    Reply

  37. My husband and i have been so ecstatic that Chris could finish off his inquiry from your ideas he got in your web pages. It’s not at all simplistic just to possibly be offering solutions which often others could have been selling. And we discover we have the writer to give thanks to because of that. Most of the illustrations you have made, the easy site navigation, the relationships you give support to engender – it’s got many astonishing, and it’s really letting our son in addition to us imagine that this issue is fun, which is certainly rather serious. Thanks for all!

    Reply

  38. F*ckin’ amazing things here. I am very glad to peer your post. Thank you a lot and i’m taking a look forward to touch you. Will you please drop me a mail?

    Reply

  39. I’d have to check with you here. Which isn’t something I often do! I take pleasure in reading a publish that will make people think. Additionally, thanks for permitting me to comment!

    Reply

  40. The good thing about these kinds blogging applications and also Content management system operating systems may be the low controls but also easy training mua allowing you developers to help you put full of substances also ‘skin’ and also as by purchasing not a great deal attempt you’ll never suspect the achievements constructing days tick every bit with out restricting subject material and / or toughness.

    Reply

  41. I favor this content that you’ve in the following. Really an inspiration for me. You are aware that people wish to make declaration they cant dependable, but this can be completely different with them for the reason that govt.

    Reply

  42. Excellent post. I was checking constantly this blog and I’m impressed! Very useful info specifically the last part :) I care for such info a lot. I was looking for this particular info for a long time. Thank you and good luck.

    Reply

  43. I’ve got to accept that this is certainly one quality information. That will positively provides a operation to be able to use on the surface place and so pretty take part in coming up with a gift and after that customized into their necessitates.

    Reply

  44. Hello I absolutely like this editorial and it has been too commendable therefore I am definetly going to tweet it. I Have to say the Wonderful research this article has is trully extraordinary !!! No one goes that extra mile now days? Bravo !!! Just another suggestion to you is that you shouldset up any Translator Application for your Worldwide Audience !!

    Reply

    • That’s really thinking out of the box. Tkhans!

      Reply

  45. Hi I love this post and it was so fabulous and I am definetly going to bookmark it. I Have to say the Superb analysis this article has is trully remarkable.No one goes that extra mile these days? Bravo!!! Just another tip you caninstall a Translator Application for your Worldwide Audience !

    Reply

    • That’s really srhwed! Good to see the logic set out so well.

      Reply

  46. Can I just say what a relief to search out somebody who really knows what theyre talking about on the internet. You positively know the best way to deliver an issue to light and make it important. More folks must learn this and perceive this aspect of the story. I cant imagine youre not more widespread since you undoubtedly have the gift.

    Reply

  47. I truly enjoyed your incredible article. Please keep up the good work. Greets ..

    Reply

  48. I’ve in no way believed that it’s going to turn out to be my addiction to read posts as it is so much mind-boggling.

    Reply

    • Hey, that’s the grateest! So with ll this brain power AWHFY?

      Reply

  49. Well I sincerely enjoyed reading it. This post offered by you is very constructive for good planning.

    Reply

  50. I’m having a small issue. I cannot subscribe to your rss feed for some reason. I’m using google reader by the way.

    Reply

  51. Pingback: Jtosme Movie

  52. Thank you for the sensible critique. Me & my neighbour were preparing to do some research about that. We acquired a beneficial book on that matter from our local library and most books where not as influensive as your information and facts. I’m quite glad to see such information which I was searching for a lengthy time.

    Reply

  53. I just found your post via Google and it’s great! Bookmarked and added to favotites!

    Reply

  54. Thank you for the blog post. Brown and I are actually saving to buy a new guide on this subject and your article has made us to save the money. Your thinking really solved all our inquiries. In fact, above what we had recognized just before we came upon your fantastic blog. My partner and i no longer nurture doubts and a troubled mind because you completely attended to all of our needs above. Thanks

    Reply

  55. I still cannot quite believe I could always be one of those studying the important tips found on your site. My family and I are truly thankful for the generosity and for presenting me potential to pursue my personal chosen profession path. Appreciate your sharing the important information I got from your blog.

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *