Canadian parents don’t like free government money. 47% of parents have yet to open a Registered Education Savings Plan (RESP) according to a new survey by the Chartered Professional Accountants of Canada. An RESP is easily the best way to save for your child’s education since the money is tax-free, and the government offers a Canadian Education Savings Grant (CESG) to help with your savings.
The CESG provides a match equal to 20% of any contributions you make annually up to a maximum of $500 a year. There is a lifetime limit of $7,200 per child, but no matter how you look at it, it’s free money that many parents aren’t taking advantage of.
What’s stopping parents from contributing?
Considering that Canadians have record debt levels, the simple answer could be a lack of money. “There are so many demands for our cash – the mortgage or rent, transportation, food and clothing ” says David Trahair, a chartered professional accountant and financial author. “After all that, many people find they don’t have any extra cash to invest in an RESP to fund their child’s education.”
It’s also clearly a lack of awareness. 80% of parents reported that they had started saving for their child’s post-secondary education and yet only 53% have set up their RESP. So what exactly are the 27% not using an RESP doing? There’s no hard evidence but I would imagine they are using some kind of savings account. This is an awful idea, even if they’re investing in a TFSA, it still doesn’t make any sense since they aren’t taking advantage of the benefits of the CESG.
Is housing to blame?
There’s no hard evidence, but you better believe that the high price of real estate in Canada is responsible for the increased debt-levels of Canadians. 40% of first-time home buyers expect help from their parents with their down payments, according to a report done by BMO. Is it possible that parents are prioritizing housing over education? Is this the right thing to do?
“It’s my opinion that a parent should help their child pay for the post-secondary education rather than helping them save for a house” says Allan Small, Senior Investment Advisor at Allan Small Financial Group, HollisWealth. “It’s more important for a child to receive help to obtain a good education so they can go out and get a well paying job, and to one day afford their own house”
Statistics Canada says the average undergraduate degree tuition in 2013/14 was $5,772 and that doesn’t include anything else e.g. books, housing, meals, supplies. That’s a lot of student debt that can be picked up over a course of 4 years. Graduating debt-free is probably more important than buying your first home.
Start Saving now
The key to making sure that you’ll have enough saved to fund your child’s post-secondary education is to start early. “If you start an RESP and invested $2,500 a year from when your child was born to age 16, you would have contributed $47,200” says Trahair. “If you made an average rate of return in your RESP of 3.45% per year after fees, the total value would build to $64,000.”
Parents can also make RESPs a part of their financial plan by simply setting up automatic payments. “By contributing this way, parents don’t really need to worry about coming up with cash by years end” says Small. “Each month a contribution is made directly from the parents bank account to the RESP and invested right away.” By using this strategy, parents can avoid some risks since they’ll be dollar cost averaging.
Low-income families can access up to $2,000 of free government money without having to put in any of their own money through the Canada Learning Bond. Once your application is approved, the Canada Learning Bond will be deposited directly into your child’s RESP every year that he or she is eligible.
There’s no doubt about it, Canadians inability to save is now having a direct affect on our children. Housing has obviously played a huge role and what’s most concerning is that we’re currently sitting at record low interest rates. Even a small increase in rates can cause serious cash flow problems for many parents. The CESG is free government money, it’s foolish to not take advantage of it.