5 Reasons You Should Save For Your Child’s Education
You know it. The cost of education has increased by more than 100 percent since the 1980s, making it difficult for parents to save enough. Thankfully, the federal and provincial governments across Canada offer Registered Education Savings Plans (RESPs) and grants to help you save for your child’s future education costs; tuition and books at accredited trade, university, and college programs. And in the United States the comparable savings tool is the 529 Savings Plan. According to experts, the projected costs of post-secondary education could reach almost $125,000 by 2036. No parent wants to see their child carry massive student debt after graduation, but a recent survey from Ipsos and Knowledge First Financial indicates that when parents haven’t saved enough, they and their children are turning to debt to fund the cost of education. Here are 5 reasons you should start saving for your child’s education today using an RESP.
1) Post-secondary programs are darn expensive
You and I never had to pay the kind of fees that our children will have to pay by the time they’re ready to go to school. Yes, we certainly had our fair share of loans, but we only averaged $25,000 of student debt when we graduated. Our toddlers today will face a whooping $100,000 - $150,000 in loans by 2036 if we don’t help them out. Not only is that a huge financial load, there can be hugely damaging, and life-altering, mental-health challenges associated with that level of debt at that age. It only takes $50 per month of savings today in an Registered Education Savings Plan (RESP) to pay for one year of school for your child in 17 years from now. And if you want to give your child a full-ride through their four-year post-secondary program, you should set aside $200 per month into their child’s RESP.
2) RESPs have free money associated with them
Everyone loves free money and RESPs qualify for free federal and provincial government grants. Why leave these grants on the table when all you have to do is apply for your child’s Social Insurance Number, seek out an RESP expert and fill out some paperwork? We’ve featured a full list of grants available to you here.
3) Money in the RESP grows tax-free until withdrawal
This is a legit tool to reduce your tax bill! Money in the RESP will be invested in the market based on your predetermined risk level, which is largely driven by the age of your child. As your child’s RESP grows, you don’t have to pay taxes on the gains until the earnings are withdrawn to cover qualifying post-secondary education expenses; then they are taxable to the child (who has a really low tax bracket because they’re a student), not you, the contributor. If your child decides not to go to school, you can transfer the RESP to another student. But keep in mind - you can leave an RESP open for 35 years; it’s a great option for a student who hasn’t quite decided what type of program to pursue. If you do decide to close the RESP, you can withdraw your contributions tax-free and the grant money goes back to the government. There are two options to withdraw the income remaining in the plan -- you can transfer the money to your RESP or withdraw the funds as income. You will have to pay taxes on this money.
4) You can invest the RESP money in whatever you want
RESPs can be invested in mutual, index or exchange traded funds, pools of funds, stocks or bonds. If you’re not an investment advisor, you should seek the help of an investment professional to assess the appropriate risk level for the money. Keep in mind that you don’t want to take on too much risk because the window of time to grow this money is typically less than 17 years.
5) If you don’t save, your kid will live in your basement for MANY years after graduation
Imagine they don’t launch until after they pay off their loans. That’s well past the age of 30. Forget “Freedom 65”, it will be “Freedom 95!”