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Saving for your Child’s Education? Get a Guaranteed 20% Return with your RESP

By Robb Engen | July 24, 2015

The vast majority of parents want their children to get a post-secondary education but recent numbers suggest they’re not backing it up with financial support. In a survey conducted by the Globe and Mail last year, more than 1,500 Millennials aged 15-33 were asked if their parents used money saved in an RESP to help pay for their college or university education. 60 percent said they received nothing from RESPs and another 8 percent said no more than one-quarter of their total education was paid for by RESPs.

 

That’s a shame because contributing to an RESP can be one of the best investments parents will ever make. Where else can you find a guaranteed 20 percent return on your money? That’s right, the federal government kicks-in 20 cents for every dollar you put into an RESP, up to a maximum of $500 per year – or $2,500 saved – with a program called the Canada Education Savings Grant (CESG).

 

Young families have a host of competing financial priorities and so putting a child’s future education ahead of present needs such as the mortgage, transportation costs, daycare expenses, not to mention their own retirement savings can be a difficult choice.

 

But parents should do what they can to help their children succeed. That doesn’t mean writing a blank cheque, but guidance and, yes, financial support will most likely be required.

 

Summer jobs don’t pay nearly enough to cover the cost of tuition, books, and room & board if your child is living away from home. Sure, students can work part-time during the school year, but expect them to struggle a bit more in the classroom.

 

Average tuition across the country is closing in on $6,000 per year, according to Statistics Canada’s latest report. Add another $1,200 for books and supplies, plus $4,000 to $8,000 in living expenses, and a four-year undergraduate degree could set you back $45,000 to $60,000 in today’s dollars. Expect those costs to exceed $100,000 in 18 years!

 

So how can parents help their children get a financial leg-up? Open up and contribute to an RESP.

 

If you have the means to put away $200 per month from the time your child is born until he or she turns 18 you’ll end up with $82,258 saved. That assumes 5 percent annual growth, plus the $480 CESG that you’ll get from the government each year.

 

Saving $200 per month for every child is no small sacrifice for most families. Young parents in particular might find that money is tighter in the first few years after having children. It’s okay to start small with RESPs: sock away $50 or $100 per month as soon as your child is born. Use the money that you get from the Universal Child Care Benefit to start an education savings plan and then add to it as your budget allows.

 

Later on, once parents finish paying for childcare and find some breathing room financially, adding another $50 or $100 per month to your RESP contributions won’t seem like such a stretch.

 

When our first child was born in 2009, I immediately opened an RESP for her and began saving $50 per month. I bumped that up to $100 per month the following year and then, when our second child was born in 2012, started saving a total of $200 per month.

 

This year, with the new enhanced Universal Child Care Benefit, our family gets an additional $120 per month ($60 per child) and so we decided to increase our total RESP contribution to $300 per month.

 

Our kids are 6 and 3 now and their RESP account is worth just over $15,000. If we continue contributing at this rate, and assume 5 percent annual growth, the RESP portfolio will be worth close to $97,000 in the year that our oldest child turns 18.

 

While that may not be enough to cover the full cost of education and expenses (for two children) in 2027 dollars, it’ll be enough to give our children options when it comes to choosing their post-secondary opportunities.

 

Parents – the most important step is to open an RESP account and start off with small monthly contributions. You’ll get access to the Canada Education Savings Grant and Canada Learning Bond (other provincial grants may also apply).

 

Bump up your contributions as your income affords it, but don’t feel you need to max out your contributions ($2500 annually, per child) in order to make a difference. As my example above shows, even $100 or $150 per month adds up to big savings over 15 – 20 years.

 

Finally, avoid group RESPs and Scholarship Trusts – they’re loaded with restrictions and fees. These types of education savings plans are frequently sold at trade shows and aggressively marketed over the phone and door-to-door.

 

The smart thing to do is to set-up an RESP as soon as your child is born. Don’t stress over how to invest the money, especially at first. Remember, you’re guaranteed a 20 percent return on your contributions – even if it’s just sitting in a savings account or GIC. And that’s pretty tough to beat!

 

Need more information about opening an RESP?

This free pamphlet will walk you through the process.

 


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Robb Engen

Robb Engen

Robb Engen is a fee-only advisor and he blogs about Canadian personal finance and investing at Boomer & Echo. Reach him at robbengen@gmail.com