Education Savings – Knowing Your Options
People are often surprised to discover how dramatically the cost of a post-secondary education has increased over the past decade. We’ve all heard how governments have scaled back spending on post-secondary education in an era of fiscal prudence. What is not always clear, however, is how these cutbacks will affect both students and parents in the future and what can be done about it today.
The Road Ahead
Future post-secondary students may have some significant financial hurdles to overcome before acquiring a degree, diploma, or certificate. While government funding remains frozen or continues to be lowered, the fees related to post-secondary education are expected to increase. This trend is already well-established; since 1980, tuition fees have grown by 115%, while average family income has risen by only 1%.†
The Need for Planning
The above figures illustrate the importance of developing an understanding of the different education savings vehicles available, as well as the need for careful planning. The way you save for education can affect your tax situation, how much you’ll be able to save, and even your estate planning. It is therefore strongly suggested that individuals seek the advice of an Investment Professional, as it will require careful analysis to determine how much you can afford to devote to education savings in light of your other goals and financial obligations. Only when this process is complete can you begin to determine the best way to save.
While there are a number of different ways you can save for an education, each option offers advantages that may be of particular benefit to you depending on your needs. Since the time frame for education savings is shorter than for other savings goals such as your retirement, special consideration should be given to options that minimize or defer the impact of taxation on earnings, and that allow for maximum investment choice. Three of the more popular options that provide for these considerations are outlined below.
Registered Education Savings Plans (RESPs)
RESPs are a popular education savings vehicle that offer the benefit of tax-deferred compound returns on interest, dividends, and capital gains earned within the plan. Perhaps the most attractive feature of the RESP is the Canada Education Savings Grant (CESG). Introduced in 1998, the CESG provides an annual top-up of 20% of your RESP contribution, to a maximum of $400 a year, per beneficiary. The lifetime grant limit per beneficiary is $7,200. In other words, the government will pay you $400 per year for 18 years for saving $2000 annually in an RESP. If you don’t use up the full 20% government contribution in any year, you can carry it forward for use toward future contributions.
RESPs allow the contributor to purchase securities from a wide selection of eligible investment alternatives. Unlike a Registered Retirement Savings Plan (RRSP), there are no foreign content restrictions to limit your choice of investments. Contribution limits are $4,000 per year ($42,000 lifetime maximum) per beneficiary, and you can name any beneficiary, including yourself. There are a number of rules and regulations attributed to RESPs and your Investment Professional should review these with you carefully before implementing this savings plan.