The Most Wonderful Time of the Year!

Written by on 2015-09-09 6:16 AM in , , , . It has 0 Comments.

By Mike Onotsky, CFP

So, back to school time, huh? Are you dancing in the streets or walking around with a look of doom and gloom on your face? The answer to that question likely depends on how close your children are to post-secondary education and, more importantly, whether or not you have a plan to help them pay for it. Elementary or junior high kids? Lots of time to worry about paying for your childrens’ education, right?

So how much will post-secondary education cost, anyway. Well, according to StatsCan, the average cost for one year of post-secondary education in 2010-2011 was $14,500 per student. This would be the AVERAGE of university, college, and trade school students’ costs including tuition, accommodation, books, meals, etc. Remember, this would also include those that still live at home. If you factor in that the cost of education increases about 3.5% a year, this would work out to $17,221 for those starting this year in 2015, $20,453 for those starting in five years, and $24,291 for those starting in ten years. Remember, this is PER YEAR so if it’s a 4 year program, those starting school in ten years are likely looking at well over $100,000 for a 4 year education!

What choices does the child have to pay for this? They could always take out student loans when the time comes, however, student loans do not typically cover all of their expenses and is depandant on their family’s income. Hopefully the student has earned money through part time work and is able to offset some of the costs themselves. Of course, gifts from family members are always nice but this is unlikely to be a large portion of the costs.

The best vehicle for education is, by far, the Registered Education Savings Plan (RESP) which pays out grants (Canada Education Savings Grants or CESG) and bonds (Canada Learning Bond or CLB) for those that contribute to an RESP for their child. In very general terms, the government will contribute an additional 20% of what you contribute to the RESP (up to a $500 maximum) in CESG each year. This means that if you contributed $2,500 per year since the child was born, the government will give you another $500 each year. If there had been years where you did not take full advantage of the maximum CESG limit, you can receive “carry forward” CESG monies on contributions up to $5,000 a year (so a maximum grant amount of $1,000) until you have caught up to what you would have received had you maximized CESG from the child’s day one. There are also lifetime contribution and CESG limits that play a factor for those that save aggressively.

Let’s play this out…

Bobby was born January 1, 2008. His parents have contributed $208.33 a month ($2,500 per year) to his RESP since the month of his birth (they had to get his SIN number first!). We are also going to assume they invested in a relatively conservative portfolio and it grew by 5% a year until he went to university, at which time his parents moved all of the funds into cash to preserve the asset for four years. In total, over the 17 years, his parents contributed a total of $42,500 and the government contributed $7,200 in CESG money (the lifetime CESG maximum allowed). Considering a growth rate of the 5%, by the time Bobby heads to university, his RESP will be worth around $80,000…80% of the average 4 year education costs projected for 10 years from now. That works out to $50 a week or $7 a day for their parents to save. In addition, the withdrawals for education are taxed in Bobby’s hands which would have a very low or zero tax cost.

The problem is this…less than half of eligible beneficiaries have an RESP in their name. In addition, StatsCan tells us there were $3.9 billion in contributions in 2013 which calculates out as $780 million in CESG paid out vs 6.92 million eligible beneficiaries who could have had $3.46 billion paid out in CESG. Canadians are leaving $2.68 billion in CESG grant money…money for their children’s education, on the table EVERY YEAR!

There are many more things to consider when looking at funding a post-secondary education…the 30% tuition grant in Ontario, student lines of credit (at favorable rates for professional programs), savings in the child’s hands (taxed at lower rates due to their lower income), etc. If you have a child who MAY head to post-secondary education, you need to speak to a Certified Financial Planner (CFP) and learn how this ties in with your overall financial plan.

Mike Onotsky has worked as a Financial Advisor and Certified Financial Planner for over 12 years. With experience working for one of Canada’s largest financial institutions and previous experience as an insurance advisor and business owner, Mike brings a holistic approach to his clients’ financial planning needs. Call him at Erb and Erb Insurance Brokers Ltd. or visit his profile page today for your no obligation review.

Back to the Fall 2015 ProvERB Insurance Bulletin.

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