Affording the Gift of Higher Education

Begin saving early to make it affordable

Terry Ruegg

The most valuable things we offer our children—honesty, respect and love for God—cost nothing. Other requirements involve major expenditures, and the largest may be the opportunity for them to attend college or university. Without financial assistance, our children may have to forego post-secondary education or assume the debilitating burden of a student loan.

We owe them the gift of higher education, but can we afford it?

Education for children or grandchildren is an investment, and like all investments, the sooner you commit, the greater your reward. This may be difficult to grasp when you are dealing with mortgage payments and the expenses of a growing family. With help from the federal government, qualified investment advice and a little planning, the funds can be amassed over time.

Start by opening a Registered Education Savings Plan (RESP). An RESP is an RRSP for your children’s education. Contributions to the plan are invested, and earnings from these investments remain free of income tax until applied to the beneficiary’s education, when they are taxed in the student’s hands. Since their anticipated income will be nil or very low, the income tax will be negligible.

Unlike an RRSP, you cannot deduct RESP contributions from your taxable income. The federal government, however, may increase the contributions via a Canada Education Savings Grant (CESG) and a Canada Learning Bond (CLB). (Residents of Alberta may be eligible for an Alberta Centennial Education Savings Grant.) Depending on the family net income, CESG will add 20, 30 or 40 per cent of the first $2,500 of your annual RESP contribution. If you contribute $200 monthly, this could generate almost $1,000 in additional contributions each year. A CLB will provide an additional amount up to $2,000 to assist modest-income families with children born after December 31, 2003.

Grandparents and family friends may open their own plan. You can launch an RESP for a grandchild,
niece or nephew, or any child you wish to assist in obtaining a college or university education by naming them as the beneficiary.

RESP growth depends on your contributions and your investment decisions. An RESP should be considered an investment, not a savings plan. Two elements that can maximize the growth of your RESP are an early start and professional investment advice. Example: a $2500 contribution made to an RESP on the day your child is born, increased to $3500 with a CESG contribution and averaging an 8% annual return, could grow to almost $20,000 by the child’s 21st birthday! You may contribute a maximum of $50,000 to an RESP, which must be collapsed within 26 years.

What happens if the child rejects postsecondary education? You may choose to:

• Wait to see if he or she decides to pursue studies later;
• Transfer the plan to a brother or sister who chooses to attend college or university;
• Transfer the money to your RRSP (less CESG and CLB funds);
• Withdraw your contributions tax-free. Investment earnings are subject to income tax; CESG and CLB contributions must be returned to the federal government.

Start with a SIN and a telephone call. The beneficiary of your RESP must have a Social Insurance Number. For information on obtaining a SIN, call 1-800-622-6232 or visit a local Service Canada centre. After the beneficiary is assigned a SIN, an investment counsellor will assist in choosing the best available plan and applying for government support.

A study by the University of British Columbia estimated that university graduates often double their lifetime income compared with high school graduates. Higher education also enables us to think clearly and critically about the world, inoculating us against propaganda while teaching tolerance and understanding. All of these qualities contribute to our role as worthy citizens in God’s world.

Terry Ruegg is a brokerage associate with FaithLife Financial (faithlifefinancial.ca)

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The article above was featured in the November 2009 issue of SEVEN magazine.

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