Reducing the cost of post-secondary education with RESPs

Ashleay: Welcome to iA Financial Group’s “In Your Interest!” podcast. My name is Ashleay and this week I’m joined by Pablo Carrera, Regional Sales Manager, to talk about some solutions for the ever-increasing cost of tuition. Hello Pablo, welcome back. It’s great to chat with you again.

Pablo: Thank you very much Ashleay. Pleasure to be here.

Ashleay: Let’s start with a simple but important question: How do you determine and maximize the amount of your RESP contributions?

Pablo: Yes, that’s an important question and a great place to start. So what we need to understand is that, in a registered education savings plan (RESP), the maximum contribution amount is not set annually; rather, it really is a lifetime maximum. Having said that, you’re not optimizing that plan by contributing more than $2,500 per year per child, because government grants are based on the first $2,500 only. So, while technically you could deposit the whole $50,000 in one shot, it wouldn’t be smart to do so because you really want to get the most you can out of the government grants. That’s what really sets this program apart.

Ashleay: Got it. I believe it’s also possible to catch up if you don’t start contributing from the birth of your child.

Pablo: Yes, absolutely. The government provides grants on the first $2,500 of the current year and you can also recover up to $2,500 per year of unused contributions from previous years. So, if you haven’t been able to maximize your contributions in prior years, they’re not lost.

Ashleay: Okay. Good, good. And what types of post-secondary institutions are recognized?

Pablo: One of the very nice features of this program is that, obviously, we’re talking about post-secondary studies. So, depending on the province where you live, like here in Quebec, for example, we usually talk about cegeps and universities; outside of Quebec, obviously we’re talking about universities. But you’re not limited to post-secondary studies within Canada; you can also use this plan to fund post-secondary studies outside of Canada.

Ashleay: Okay.

Pablo: And this is one of the better features of the plan: as long as the program of study qualifies—and there are certain requirements—the government will recognize the use of RESP savings in order to fund post-secondary education outside of Canada.

Ashleay: Okay, then we would use it for living expenses such as housing, school supplies, food, all of that.

Pablo: Exactly. The thing to keep in mind is that it doesn’t only have to be used for tuition.

Ashleay: Right.

Pablo: It can be used for all expenses that the student incurs.

Ashleay: Okay, perfect. And how can we help the beneficiary manage his or her money once it’s paid out and, you know, see the possibilities for reinvesting those funds?

Pablo: Absolutely. In fact, this is one of the areas where the advice of a trusted financial advisor comes in handy, once again, because, obviously, throughout the accumulation phase, throughout the savings phase, that advisor will guide and will help. But when it comes time to withdraw and use the money, here’s an area where you can consider things like the beneficiary’s level of income, for example—because part of the plan will be taxed in the beneficiary or the students hands, meaning their level of income becomes important. You may want to consider gradual disbursements to avoid paying the maximum amount of tax. You may also want to consider rolling over some of those contributions into the accounts of the beneficiary’s younger siblings. You can actually take the same money that earned grants and use it again and again on younger siblings and go and get more grants from that same money. You can consider, obviously, investment options for these amounts of money when they are withdrawn from the plan. Basically, there are a lot of areas where a good, trusted advisor can add some value.

Ashleay: Right. And how much does education cost as we speak?

Pablo: So, the cost of education has consistently been increasing. Statistics Canada keeps some of these numbers and the latest ones that we have figure tuition costs, on average in Canada, somewhere around $7,000 or $7,500 for post-secondary education. That’s undergraduate and graduate studies in Canada. Having said that, it does vary from one province to another. And one thing to keep in mind is, obviously, there are additional costs. As we mentioned earlier, things like housing, things like transportation, food, clothing, etc. It’s not just the cost of the tuition that you have to factor in; you have to consider all of the aggregate costs of post-secondary studies. Another issue is that the bill explodes when you look at students pursuing their studies outside of Canada. And for this, if I may—I’m living proof of this: last year, my daughter was accepted to do the second year of her bachelor’s degree at the University of Melbourne, in Australia. She just returned last month to complete her third year here. But I can tell you that that incredible opportunity would have been very difficult to finance had we not been contributing to her RESP since she was born.

Ashleay: Right.

Pablo: So there really is a lot of added value to having these savings. In fact, I’ll take it a step further: You can actually give your children options that they, perhaps, would not have had otherwise.

Ashleay: Got it. And finally, RRSP, TFSA, FHSA or RESP? I feel like Aretha Franklin over here.

Pablo: Ha-ha! In fact, great question because all those plans have different uses, right? There are different reasons for having all these different plans. The RESP—the registered education savings plan—is absolutely the one that is designed for your child’s post-secondary education. It’s the best plan for that. And we can do a quick comparison. Let’s consider a registered education savings plan (an RESP) for a family with a net income of somewhere between $53,000 and $106,000—I know it’s a pretty wide range. And let’s say they contributed the grant maximum of $2,500 per year, which works out to about $208 a month, over a period of 17 years, and were able to earn an average rate of return of around 7% on that money, they could set aside over $111,000 for their child’s studies.

Ashleay: Right.

Pablo: Now, when you consider that, they will have contributed about 45,000 of their own money, and they end up with $111,000. You do the math: that’s over 150% growth over the span of 17 years.

Ashleay: Yeah.

Pablo: That’s the magic of this plan. That’s its huge attraction. When you compare it, for example, to a TFSA, keeping everything constant—so same balance, same term, same return—now you’re talking about needing to contribute something like $3,400 per year instead of $2,500, because you lose the grant portion.

Ashleay: Right.

Pablo: So right away, this means you have to dip into your pocket for about 35% more money just to get to the same result in the end. And that’s not even comparing, for example, a regular savings account or a non-registered plan, where you would need to, obviously, pay taxes on the gains that you make every year—because in a non-registered plan, gains are taxable. In that case, you would need to set aside over $4,300 per year.

Ashleay: Oh!

Pablo: That’s about 70%—close to 75% more than just a regular education savings plan to get to the same amount in the end. So, you see how, with these different types of plans and these different accounts, a good, trusted financial advisor is going to be able to help you, guide you towards the right plan for your objective.

Ashleay: Wow. All right. Well, great stuff! Thank you, Pablo, for coming to talk to us about RESPs. And once again, very relevant! I also want to say a big thank you to all our listeners! We’ll see you again next week. Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.