Postsecondary Education Savings Strategies that Work

Prepare yourself for "sticker shock" if you are shopping for a university education for your child. According to Statistics Canada, the average Canadian dental student paid nearly $14 000 for tuition fees in the 2009/2010 academic year.¹ Add the cost of books, room and board, meals and personal expenses, and the annual price tag doubles. This could mean a total outlay of more than $100 000 by graduation.

Tuition fees for all undergraduate programs are on the rise. On average, they have risen 3.9% over the past 4 years—outpacing the rate of inflation—so, if the trend continues, a student who enrolls in dental school 10 years from now will pay more than $80 000 in tuition fees over 4 years.

Therefore, if you don't begin saving well in advance for your children's future postsecondary education, financing that degree may require you and/or your child to take out substantial loans. These loan interest costs would push postsecondary education costs even higher.

For postsecondary education savings, an RESP (registered education savings plan) is a superior vehicle that offers tax-sheltering and government grants. One of the available grants is the Canada Education Savings Grant (CES Grant)—a $7200 top-up grant provided by the federal government for each eligible RESP beneficiary. You can receive the maximum lifetime grant of $7200 by contributing $2500 each year into an RESP in the 14 years after a child's birth and $1000 in year 15. The maximum that can be contributed to an RESP is $50 000. You'll forego much of the CES Grant if you contribute the maximum amount in one lump sum, but the payoff may be worth it (see table).

Whichever contribution strategy you choose, it's important that you start saving as soon as you can to maximize the potential for growth in the plan. Even if you have competing priorities such as paying down the mortgage and saving for retirement, there are ways to work postsecondary education savings into the household budget.

By investing the $1200 universal child care benefit (UCCB), which is available to families with children under age 6, each of your children could have nearly $20 000 in their RESPs by age 18—even if you never contribute another cent. (The calculation includes the UCCB and CES Grant for 6 years, and assumes a 6% annual rate of return.)

The tax refund you receive from your RRSP contribution is another possible source for money for your children's RESP.

You may also consider asking family members such as aunts, uncles and grandparents to contribute to your children's RESP. However, contributors should be aware of how much the others are putting in to avoid exceeding the lifetime contribution maximum.

There is a time limit and other rules associated with the CES Grant. For example, the RESP needs to be opened by the year in which your child turns 15* to be eligible for the CES Grant and the last time the grant can be collected is the year your child turns 17. As well, no more than $1000 of the grant can be collected in any one year, so if you decide to make annual contributions, an early start will help ensure your child's RESP qualifies for the full grant amount.

For families who have contributed the maximum $50 000 allowed for each child, contributing to a tax-free savings account (TFSA) is another excellent way to save for postsecondary education. A TFSA also has an advantage that an RESP does not have: withdrawals from a TFSA are not taxable.

You can contribute up to $5000 annually to your own TFSA for your child's postsecondary education (or for any other savings goal). You can also gift $5000 each to family members (e.g. to your spouse or child age 18 or over) so they can contribute to a TFSA of their own. Income attribution rules don't apply to the money you give to your family for their TFSAs, so you don't have to worry about any potential tax consequences. However, you should keep in mind that you would lose any say in how the money is used once you have gifted it.

THE AUTHOR

Ms. Okamoto is a certified financial planner and a senior investment planning advisor at CDSPI Advisory Services Inc.

Contact a financial planner at CDSPI Advisory Services Inc. at 1-877-293-9455, ext. 5023 for personalized assistance with your education savings and other investment goals. (Restrictions may apply to advisory services in certain jurisdictions.)