When you first start growing your family, planning for the day your children leave the nest is likely to be the last thing on your mind. This, however, isn’t something you want to put off for too long because high school graduation day will be here sooner than you think (even if, some days, it may feel like it will never arrive!). Without a plan to consistently contribute to a savings account for their post-secondary education, you could find yourself going into debt while trying to support your child (or children) as they go after their dreams.
In Canada, post-secondary education costs have gone up considerably over the last few decades and continue to rise year to year. As costs rise, so does financial strain for parents.
Many parents are left wondering how much they should be saving for their child’s education. They’re also asking when is the best time to start putting money away for their child’s post-secondary years. The answer is simple: the earlier you start saving, the more you’ll likely be able to put away. Setting money aside on a consistent basis, especially with rising inflation and pandemic costs, however, tends to be easier said than done.
This article explores when, how, and what to expect while saving for your child’s post-secondary education. Continue reading to learn more.
When To Start Saving for Your Child’s Education
While they might still be learning their ABCs, your child’s post-secondary education can seem like something you’ll have more time to deal with down the road. That said, with the cost of living and price of tuition continuously on the rise, putting aside whatever you can now will add up to be a big help when the time comes.
According to Stats Canada, “Nationally, Canadian students enrolled full-time in undergraduate programs will pay, on average, $6,693 in tuition for the upcoming 2021/2022 academic year, up 1.7% from the previous year. The average cost for graduate programs rose 1.5% to $7,472”.
Although we don’t recommend foregoing your own retirement savings to build up your children’s education funds, it’s no surprise that the sooner you’re able to start saving for them - the better.
How To Start Saving
As rising costs loom, there’s no need to worry about selling your first born in order to send them off to college. Let’s take a look at the savings accounts plus government grants and benefits that can help as you start putting money away for school.
Registered Education Savings Plan (RESP)
An RESP is a tax-advantaged savings account that is registered with the Canadian Government. The money in an RESP is invested tax-free, making this a specialized savings account designed to maximize the amount of savings available for your child’s post secondary education. To stay consistent with contributions, many parents opt to set up automatic contributions with the monthly minimum contribution being $25.
Have more than one child in your family? You can start as many RESPs as you need to save for all of your children’s education, but there is a lifetime limit of $50,000 per beneficiary.
There are three types of RESPs:
1. Family Plan
A family plan is ideal when you have more than one child and when blood relatives (parents, siblings, and grandparents) would like to contribute.
2. Individual (non-family) Plan
With this plan, only one beneficiary is named for the RESP and they don’t necessarily need to be a direct blood relative.
3. Group Plan
Generally, with a group plan, you’re making regular payments into the plan over a certain period of time. The funds added to a group plan are actively managed in low-risk investments. Meet with Ken to learn more.
Unsure which plan is right for you? Schedule a meeting with Ken for free advice.
Canada Education Savings Grant (CESG)
The CESG is a grant paid directly from the Federal Government into an RESP. This grant matches 20% of annual contributions you make to all eligible RESPs up to a maximum of $500 per beneficiary per year with a lifetime limit of $7,200. Everyone with an RESP is eligible to receive the CESG, regardless of household income.
Tax-Free Savings Account (TFSA)
While we wouldn’t recommend a TFSA as your first choice for building savings for education (because of the CESG and additional tax incentives that come with an RESP), a regular tax-free savings account is a great way to set funds aside for college or university above and beyond the RESP maximum contribution limit of $50,000.
Provincial Education Savings Incentives
Depending on where you live, there may also be assistance available to you on a provincial level. In BC, the British Columbia Training and Education Savings Grant (BCTESG) will contribute $1,200 to eligible children. Learn more about the BCTESG here.
How Much Should You Be Saving?
We can’t stress enough that it’s best to start saving as early as possible for post secondary education. Education costs only continue to rise and will likely be much higher than the current average when it’s time for your child to start college or university. On top of tuition and textbooks, there’s additional costs such as the price of living on campus, food, and supplies just to name a few.
While every family is different, the amount you choose to save will depend on things like your household income, daily expenses, retirement plan, generosity, and other investments you may already have.
Keep in mind that you have the option of opening a flexible RESP account which allows you to make regular contributions that start at $25 per month.
💡 Further reading: What is a Financial Plan and Why Do I Need One?
What Happens If Your Child Doesn’t Continue Their Education After High School?
Now, after years of saving, it could be the case that your child decides they don’t want to take the conventional route of post-secondary education. Don’t panic - your saving wasn’t all for nothing. There are still options available to you. An RESP can stay open for 36 years, giving them the freedom to use it in a few years if they change their mind.
If you decide to close the RESP, the money that you put in will be returned to you. Keep in mind that you will not be taxed on the amount you contributed into the RESP but you will need to pay taxes on the money that you earned in your plan as interest.
As for the CESG, the money can be shared with a sibling if they have grant room. Otherwise, the grant must be returned to the Government of Canada.
From ABCs to RESPs to PHDs
Getting a post-secondary education is a privilege and if you’re in a position to support your child throughout their college/ university years - no matter how small or large of a contribution you can make - we hope they appreciate just how fortunate they are.
As costs continue to rise, it may be a challenge to find extra room in your family budget. This is why we believe the earlier you can start with consistent contributions the better ($25/month over 18 years adds up).
Ready to start saving? Call 250-861-7777 and make an appointment with Ken today.