Even though Noor Mirza Rashid is barely a year old and still mastering walking and talking, her parents are already thinking about paying for her university education. “I’m very worried. I understand that you have to start saving early,” says her mom, Sabah Mirza, a 31-year-old lawyer in Toronto.
The numbers are scary, with some experts forecasting that the cost of a university education, including tuition and lodging, will run upwards of $100,000 by the time Noor graduates high school. Luckily for Noor, her parents are already investigating options, the most popular of which are Registered Education Savings Plans (RESPs).
RESPs are a good deal for the simple reason that “the government gives you money, and that doesn’t happen too often,” says Linda Knight, vice-president of BMO Mutual Funds in Toronto. In most cases, if you contribute $2,000 a year to an RESP, the federal government chips in an added $400.
There are two basic types of RESPs: self-directed and group, or “pooled,” plans. Group plans are popular for their simplicity — you make your regular monthly payments and the company takes care of the rest. But in the past these plans have drawn criticism from regulators for questionable marketing tactics. Some also enforce restrictive policies. For example, a few only allow for just one payout per school year.
Self-directed RESPs, which can be set up at most Canadian financial institutions, tend to be more flexible and transparent. You can invest in mutual funds, stocks, or GICs, and choose from among conservative to aggressive investment options. “If you have a really young child, you can be a little more aggressive with your asset mix,” says Knight. When university comes, students can withdraw what they need, when they need it.
Both types of RESPs qualify for the Canada Education Savings Grant (CESG). Under this program, the feds contribute 20 cents for every dollar you put into an RESP, up to $2,000 a year per child. That means the maximum annual grant per child is $400 for most middle-class families. (You can contribute up to $4,000 a year to a child’s RESP, to a lifetime maximum of $42,000.)
Lower-income families get an even better deal. Recent changes have increased the grant to 40 cents on the first $500 invested by families that earn less than $35,595, to a maximum $500 a year in CESG contributions, and 30 cents on the first $500 for families earning between $35,595 and $71,190, to a maximum of $450 a year. Lower-income families may also be eligible for the Canada Learning Bond, a $500 one-time RESP grant, which is supplemented by an additional $100 a year until the child is 15.
You don’t get a tax break for money you put into an RESP. But the funds grow tax-free and the withdrawals are taxed in the student’s hands. In most cases, then, the withdrawals are effectively tax-free since any amount owing is offset by the student’s education credit and personal tax credit.
The funds can be used at any qualifying college or university, and even some apprenticeship and correspondence programs. If your child decides not to pursue further education, you get your principal returned and any returns on that money can usually be rolled into RRSPs to avoid taxes; all the grant money, however, goes back to government coffers.
Some families prefer to invest outside of RESPs — in informal trusts, by purchasing stocks or bonds in the child’s name, or simply by opening a savings account. The drawback with these options is that they don’t qualify for the CESG. Thus, it only makes sense to use them once you’ve received the maximum grant.
If the task of paying for your little one’s university education seems daunting, remember that it’s not solely your responsibility. “I would like to have enough put aside so Noor doesn’t graduate $100,000 in debt,” says Sabah Mirza. But “I also expect her to work and contribute towards her own education.”