Putting money away for education can be a daunting task, but a little planning can make it a lot more manageable
By Sarah Sawler
Have you started saving for your child’s higher education? If not, you’re certainly not alone. Between paying the mortgage or rent, covering kids’ activities, shelling out for ever-rising grocery bills, and all the other day-to-day costs of life with kids, it’s hard to justify carving out room in the family budget for something that seems so far away.
But planning for your child’s higher education is well worth it. The education data from the 2016 census won’t be released until the end of November, but the stats from the last census show a clear connection between income and education level. Atlantic Canadians between the ages of 25 and 64 (working full-time) earned an annual average income of $37,403 with a high school diploma, $42,937 with a college certificate or diploma, $56,048 with a bachelor degree, and $66,535 with a post-graduate degree.
So how do you get started? We talked to Stephen Frame, an assistant manager at Scotiabank and Ed Bellamy, a financial advisor at CUA, for some advice from the experts.
It’s common advice, but we can’t emphasize it enough. Higher education is expensive, and tuition costs just keep going up. Starting to put money aside at the very beginning allows you to put away smaller amounts of money at a time (which makes a smaller dent in the monthly family budget). But it also allows more time for investments to grow, and may help you maximize the benefits from any government programs.
“It’s about taking a disciplined approach,” Frame says. “If [you] put a small amount aside each month for every pay, it’s amazing how quickly that can grow. Obviously, it’s a way to make sure you’re paying yourself or paying for the family first, instead of just having that loose change in your pocket that loves to get spent.”
LOOK AT THE BIG PICTURE
But while saving for education is important, it can also be a balancing act. It’s important to make sure all your family’s short-term and long-term goals are considered.
“When you do the math on those numbers for saving, it can be a substantial monthly or annual financial obligation for families,” Bellamy says. “It’s important when you’re setting up those plans or savings programs that it’s working in tandem with the family’s other goals. You want to make sure the education savings isn’t impeding other financial priorities or obligations of the family. We look at it from a cash flow perspective.”
WHAT ARE MY OPTIONS?
Now that you know what you need to do (talk to a financial expert about saving for education as early as possible), you probably want a little information on what your options are. Basically, there are three options, depending on your family’s situation: Registered Education Savings Plans (RESPs), Tax-Free Savings Accounts (TFSAs), and trusts.
REGISTERED EDUCATION SAVINGS PLANS
RESPs are generally the go-to option for education savings but, like anything, they have their pros and cons. Pros include the Canada Education Savings Grant, which typically provides 20 cents for every dollar you contribute, to a maximum of $500 per year, or $7,200 per child. There’s also the Canada Learning Bond for eligible Canadians, which offers a maximum government contribution of $2,000 per child. And contributions are tax-sheltered, but this is where the cons come in.
“The funds grow on a tax-sheltered basis while they’re in the plan, but when they come out they’re taxable,” Bellamy says. The educational assistance payments, of course, are taxed in the child’s hands. Under normal circumstances, or under usual circumstances, the child or student doesn’t have enough income to be in a taxable position anyway, so it’s a moot point. The downside is the what-if. The what-ifs are hard to figure out until you’re only a few years away from the child going to school. The intricacies of those rules are something I think every subscriber needs to understand.”
TAX-FREE SAVINGS ACCOUNTS
Bellamy says TFSAs are getting more and more popular.
“The tax-free savings account is a really interesting vehicle for education savings,” he says. “It provides the same tax-sheltered growth the RESP does, but it doesn’t have — and this is a real plus — those rules and tax consequences at withdraw.
Unlike the RESP, you can also withdraw the money for anything at all. It doesn’t have to be used for education if your child decides not to go on to postsecondary education, and it’s not subject to the array of rules around using RESP money (like spending it on a qualified institution as defined by the program).
This is an option for those of us with a little more wealth. Bellamy and Frame both mention it, but it’s not nearly as popular as the other two options. Essentially, Bellamy explains it as “a savings account that’s designated informally as an in-trust account for the child.” It’s less popular because, sometimes, the interest income is attributed to the parent instead of the child.
“The other potential downside is that, as a trust designation, once the child becomes the age of majority, that money moves to the child’s ownership outright, and the parent effectively loses control of it,” he says. “A little bit of caution there, but it’s a third option some people do consider.”
And if you haven’t started yet, it’s never too late.
“Even if you feel like you can’t do it for whatever reason, it’s important to meet with a financial advisor,” Frame says. “Often we’re able to identify other opportunities to reduce cost, create savings. Any of those can be redistributed to make any of these goals, like education or other things, a reality.”