Savings and Loans

Introduction: Saving for post-secondary education

 

With the rising cost of education since the 1990s, it is becoming increasingly difficult for some students to pay their own way through post-secondary education. However, this depends significantly on the program they are enrolled in, as well as which province they are attending school in.

 

Registered Education Savings Plan (RESPs) are the best way parents and other individuals can save for a child’s education because significant grant money is offered by the government for making contributions (find out more below). Start saving as early in your child’s life as possible to maximize the available grant money.

 

If your child’s savings and other sources of income do not cover their costs, government or private loans may be available for students.

Registered Education Savings Plans (RESPs)


A Registered Education Savings Plan (RESP) is an account offered by the federal government designed to help parents (and others) save for a child’s future post-secondary education. The great advantage of this account is that the government provides free money for contributing, called Canada Education Savings Grants. Some provincial governments offer additional incentives (learn more below).

 

The rules surrounding RESPs can be confusing and can lead to difficulties in getting maximum grant money, withdrawing funds, and more. Here, you can learn the basic rules to know how to maximize savings for your child and manage the withdrawal of their RESP funds. If you don’t have an RESP for your child yet, it may not be too late to start.

Types of RESP plans


An RESP is opened by a subscriber (e.g., you) for a beneficiary (e.g., your child) who is intended to receive the funds in the future. There are different types of plan with different rules.

 

♦ An individual plan can be opened for a child by anyone, including family members, friends, and the child themselves. Only one person can be named as a beneficiary and they can be any age.

 

♦ A family plan can be opened for a child by parents, grandparents, great-grandparents or siblings. The subscriber can also name additional beneficiaries who are related to them by blood or adoption as long as they are 21 years or younger when they are named.

 

◊ Although the funds for multiple children can be in the same account, the same limits on grant money apply to each child. For example, parents cannot maximize the grant money for two children and then withdraw all the grant money for only one child. Contributions and withdrawals need to be tracked for each individual child, otherwise you are at risk of losing grant money.

 

♦ A group plan (or scholarship trust) is a pooled savings account offered by an institution that manages the savings of many families. You are eligible for the benefits of an RESP (and benefits specific to the group plan), however group plans will have additional rules and regulations. This may include having a fixed amount you need to contribute, additional fees, and restrictions on eligible PSE programs. 

 

◊ A subscriber who chooses to go this route must carefully read the rules and regulations and be confident they can commit to a long-term payment schedule.

How to open an RESP


An RESP is opened by a subscriber (e.g., you) for a beneficiary (e.g., your child). The rules about who can be a subscriber or beneficiary depend on the type of plan. RESPs are offered by many providers, including banks and credit unions. You will need the Social Insurance Numbers (SINs) of the subscriber and the beneficiary to open an account.

 

Different RESP providers have different fees and rules surrounding RESPs and they may offer differ services. The CanLearn website has a comprehensive list of questions you should ask your provider before opening an account. Before you do this, you should learn about RESPs, as you cannot always be sure your bank is giving you accurate information. Carefully review the contract before signing it and make sure you are receiving all the grants you are eligible for.

 

Money that is in an RESP belongs to the subscriber right until it is withdrawn for the beneficiary. If multiple family members and friends want to contribute to an RESP, consider having a single account for all contributions which is under the control of parent(s) or other principal caregiver(s).

What are Canada Education Savings Grants?

 

Canada Education Savings Grants (CESGs) are part of your child’s Educational Assistance Payments (EAPs). All the values below are from 2014.

 

♦ For the basic CESG, the government will add $0.20 to your RESP for every dollar contributed, up to $2,500 in contributions and $500 in grant money per year.   

 

♦ You can “catch up” on missed grant room one year at a time, therefore you can contribute up to $5,000 and receive $1,000 in grant money in one year.

 

◊ If money is withdrawn from an RESP, the associated grant room is lost forever.

 

♦ Children from low-income and middle-income families can earn an additional CESG of 20% or 10% (respectively) on the first $500 or less contributed to the RESP annually.

 

♦ The maximum amount a child can receive from both the basic and additional CESGs in a lifetime is $7,200.

 

♦ Your child will only receive government grants until the end of the calendar year when they turn 17 years old. Beneficiaries who are 16 and 17 years of age will only receive CESGs if a certain amount of money is contributed before the end of the calendar year in which they turn 15, see the conditions here.

 

♦ This calculator shows how CESGs enhance the value of your RESP.

RESP investments

 

Interest earned on RESP funds is part of your child’s Educational Assistance Payments (EAPs). RESPs can be invested into GICs, mutual funds, stocks, and bonds, just like TFSAs and RRSPs. Your financial institution will provide you information on minimum amounts, investment terms, and interest rates.  

 

♦ For more information, the Financial Consumer Agency of Canada provides a guide on investment decisions and GetSmarterAboutMoney.ca outlines differences between investments and the pros and cons. For advice, consult a financial professional.

Provincial education savings programs for RESPs


Alberta, Saskatchewan and Quebec have additional incentives for RESP holders. In all cases, applications must be made through your RESP provider, but not all RESP providers offer all grants/incentives.

 

♦ A $500 grant is available for children of Alberta residents born in 2005 or later through the Alberta Centennial Education Savings (ACES) Plan. Additionally, if a child turned 8, 11 or 14 in 2005 or later, the ACES will contribute $100 to their RESP if they meet certain conditions. You have 6 years to apply for each grant.

 

◊ Independent students can apply for the grant based on their own residency.

 

♦ The Saskatchewan Advantage Grant for Education Savings (SAGES) Program: If the beneficiary is a resident of Saskatchewan at the time when contributions to an RESP are being made, they can receive a 10% grant (up to $250 per year) on contributions until the end of the year in which they turn 17.

 

♦ The Quebec Education Savings Incentive (QESI) is a refundable tax credit for residents of Quebec less than 18 years old that is paid directly into an RESP.

When is it too late to open an RESP?

 

An individual RESP can be opened by anyone for a beneficiary of any age (including themselves). In a family plan, beneficiaries must be named before they are 21 years old. The main benefit of RESPs is the additional funding provided by the government. Once these funds are no longer available, you may be better off with another savings plan. See the age limitations of CESGs and provincial incentives described above.

 

If there are no remaining incentives available for you, you may want to look into other savings options, such as a TFSA.

How much money can be contributed to an RESP?


If $167 is contributed per month from the time your child is born until they turn 17 years old, they will have received the maximum grant money from the basic CESG. If they qualify for an additional CESG, you can contribute less money per month to reach the maximum. You can "catch up" on missed grant room one year at a time, therefore you can contribute up to $5,000 ($417 per month) and receive $1000 in grant money in one year from the basic CESG. The lifetime contribution limit is $50,000 per child.

Should my child contribute to their own RESP?


If they receive an allowance or have a part-time job, they may want to help contribute to their RESP savings and further increase their grant money up to the maximum allowed. They can also ask family members and friends for RESP contributions for their birthdays or other occasions.

 

If they are contributing their own money to an RESP for which someone else is the subscriber, that money now officially belongs to the subscriber. A beneficiary should keep a record of how much they contribute. Have a discussion with them about what happens to this portion of the funds if they decide not to enter a post-secondary program.

 

A child can also create an RESP for themselves (though some RESP providers may have age limitations). If they do so, remember that the rules and limitations apply across all RESPs for which that individuals is the beneficiary. If you and your child in combination are exceeding the limit for which you will receive grants, your child is better off opening a different type of savings account for themselves.    

Money for RESPs for lower and middle-income families

 

♦ Children from low-income and middle-income families can earn an additional CESG of 20% and 10% (respectively) on the first $500 or less contributed to the RESP annually. The maximum amount in grant money is $600 for low-income families and $550 for middle-income families.

 

◊ Net income cut-offs for the additional CESGs change every year (see Canada Revenue Agency for 2013 levels). Find out your net family income by checking your Notice of Assessment (add two net incomes if you are married or common-law), your Canada Child Tax Benefit Notice of Determination, or your Goods and Service Tax Credit Notice of Determination.

 

♦ The maximum amount a child can receive from both the basic and additional CESGs in a lifetime is $7,200. Children from low-income and middle-income families can receive more grant money per year, however the lifetime maximum they can receive remains the same.

 

♦ The Canada Learning Bond offers up to $2000 for children whose families receive National Child Benefit Supplement to help give parents a head start on saving for post-secondary education.

 

◊ Parents (or primary caregivers) can receive up to $25 to cover the cost of opening an RESP, $500 to contribute to the RESP immediately, and $100 to contribute to the RESP per year until the beneficiary is 15 years old.

 

◊ This money is part of your child’s Educational Assistance Payments (EAPs) and can only be withdrawn if they enrol in a PSE program. 

Withdrawing money from an RESP

 

♦ Your child will have to provide proof of enrolment in a qualifying PSE program to withdraw funds as the beneficiary. They can do this before they start attending classes. Ask your RESP provider what documentation they require as proof of enrolment.

 

◊ Qualified programs include full-time, part-time and distance learning programs at universities, colleges and other educational institutions if they meet certain criteria.

 

♦ The following rules apply to withdrawing Educational Assistance Payments (EAPs; including interest and government grants):

 

◊ The money is intended for allowable educational expenses that serve to further a student’s studies, including tuition, living expenses, a laptop, and anything required to support them in the program.

 

◊ For the first 13 consecutive weeks in a PSE program, up to $5,000 in EAPs can be withdrawn for full-time studies and $2,500 for part-time studies.

 

◊ After 13 weeks, there is no limit on EAP withdrawals unless a student takes a break from their studies for 12 months. In this case, the $5000 limit is re-instated.

 

◊ EAP payments can be taken out for up to 6 months after the end of a program (may vary by provider) if they are for educational expenses. Ask your RESP provider if documentation of expenses is required.

 

♦ The contributions made to the RESP do not follow EAP rules. There is no limit on how much can be taken out.

 

♦ Specify to your bank how much in EAPs and how much in contributions you want to withdraw. It is generally a good idea to maximize EAP withdrawals while you can or there is a risk they will become inaccessible in the future (e.g., if the child drops out PSE). However, EAPs are taxable so the beneficiary should keep track of how much taxable income they will have to claim that year (learn more about RESPs and taxes below).

 

◊ If you have a family plan, do not take out more than $7,200 in grant money for any one beneficiary or you will be subject to paying excess amounts. Ask your provider for a record of how much grant money is being paid to each beneficiary.

What happens to an RESP if my child does not enrol in a PSE program?

 

♦ RESPs can stay open for up to 36 years, so a child does not have to attend a PSE program immediately in order to withdraw the funds.

 

♦ If the beneficiary ends up not attending school, the subscriber may be able to change the beneficiary or transfer the money to a different RESP (fees may apply, talk to your RESP provider). If there is no one it can be transferred to, the contributions made to the account can be taken out without penalty and government contributions will be lost. Any earnings made on the investment (i.e., interest) may be transferred to an RRSP or withdrawn with a 20% penalty (some restrictions apply). 

Who has control over RESP withdrawals?

 

♦ The subscriber must request RESP withdrawals, as the account is under the subscriber’s name and they have control over it. Talk to your RESP provider for details about the process.

 

♦ You may want to take the money out as quickly as possible and give the beneficiary all of their money immediately for them to use as they choose.

 

◊ Remember that all Educational Assistance Payments (EAPs) must be withdrawn while the beneficiary is eligible to receive them as a student.

 

♦ You may choose to specify how the savings are used. For example, you may want to pay for a portion of their expenses, certain types of expenses (e.g., only tuition and fees), set grade minimums for receiving the money, or specify other stipulations.

 

♦ Have a conversation with your child about how you expect them to use the savings and figure out a plan that best fits your individual circumstances.

RESPs and taxes

 

♦ When money (including grants and interest) is in an RESP, it is not taxed.

 

♦ When money begins to be withdrawn, the student beneficiary will receive a T4A slip for income tax purposes which includes all the Educational Assistance Payments (EAPs) they withdrew that year (including interest and government grants).

 

♦ Due to the generally low income of students and tax credits they may not have to pay any income tax.

 

♦ However, in some cases it may be beneficial to limit EAP withdrawals in the year(s) when the beneficiary is making a higher income.

Learn more about RESPs

 

The rules surrounding RESPs can be confusing and can lead to difficulties in getting maximum grant money, withdrawing funds, and more. Here are some additional resources:

 

♦ The RESP Book by Mike Holman

 

♦ This free podcast with Mike Holman

 

♦ Saving for School by Gail Vaz-Oxlade

 

Money Smarts and GetSmarterAboutMoney both have information on RESP rules.

Other ways to save for post-secondary education

 

 

A RESP plan should be your first choice to save for a child’s education as long as they are eligible for grants and incentives from the government.

 

♦ If they are no longer eligible for government grants, consider opening a Tax-Free Savings Account dedicated to post-secondary savings.

 

♦ The Globe and Mail (2013) suggests 5 alternatives ways of saving for post-secondary education.

Discuss financing post-secondary education with your child


♦ Talk to your child about the savings you have for their post-secondary education and how they can help contribute or have them create their own savings account.

 

♦ Discuss other avenues of paying for their education, such as applying for scholarships, grants and bursaries, or a government loan.

 

◊ You may not be fully informed about topics, you can find out more about non-repayable funding here and student loans here.

How much should I save for my child’s education?

 

♦ When they are very young, you cannot know how much your child's education will cost. If you save as much as you can, you can choose how the savings will be used once they are older.

 

◊ If they never enrol in PSE, there are options for withdrawing your contributions and the interest made on your contributions.

 

◊ When they have an idea of the program they would like to pursue, have your child create a budget to estimate how much their education is going to cost. Expect a rate of inflation of 3 to 5% for every year.

 

♦ Figure out how much you can afford to contribute monthly and re-assess every year.

 

◊ For some parents, a significant source of support will be reducing your child’s living expenses by having them live with you during their studies. Some research estimates that the average Canadian student saves $44,000 over a 4-year university degree by living at home.

 

♦ The Parental Contribution Calculator provides an estimate of how much the government expects parents to contribute to their child’s education (based on income and other factors).

How can my child maximize their funds during their post-secondary education?

 

Students can:

 

♦ Start budgeting to keep track of their income and expenses.  

 

♦ Apply for non-repayable funding: scholarships, grants and bursaries.

 

♦ Learn about savings options.

 

♦ Learn about their options for working.

Income tax savings

 

 ♦ When students file their income tax, they can take advantage of the many tax incentives (learn more about income tax for students here).

 

♦ They will have an option to transfer tuition, education and savings amounts to parents, grandparents or a spouse. This will reduce the amount of income tax the recipient of the tax credit will have to pay. 

 

◊ They may want to discuss how the tax savings will be used, which will depend on your individual circumstances.

 

◊ You may choose to pass the savings onto the post-secondary student (therefore, you are facilitating an advance on their tax credit). Alternatively, you may want  to keep the savings (i.e., to offset the financial support you have already provided).

Student loans

 

♦ Governments and financial institutions offer loans to help students pay for their education.

 

◊ Government loans are only provided to students who have demonstrated financial need. Students who apply for government loans will also be considered for government grants (see Scholarships, bursaries and grants). 

 

◊ Compared to private loans, government loans are beneficial because no interest accrues while students are in the program, they have 6 months after the end of their studies before they have to start repayment, and repayment assistance is available. Interests rates may be lower (i.e., some provincial loans) or higher than private loans.

 

♦ Learn more about government loans and private loans.

 

♦ For some students, loans are necessary to pursue post-secondary education. However, they should also think about how they can maximize their funding. If they receive more funding than expected or have fewer expenses, they can start paying back their loan earlier.

Should I help my child repay debt?

 

♦ If your child is having difficulty making debt repayments, you may want to consider helping them out and letting them pay you back when they are back on their feet.

 

◊ This may be extremely helpful for graduates with student loans who are having a hard time finding a job.

 

♦ If you are helping your child financially, you may expect them to update you on their financial situation and discuss their decisions with you.

 

♦ If you are having to help your child repay debt because they are financially irresponsible, helping them pay off their debt is only a temporary solution.

 

♦ Direct your child to resources about dealing with debt (see Dealing with stress).