• Jeff Sproul

Education Savings - What Are Your Options?


With household debt growing to record levels, student borrowing has emerged as a special concern for Canadians -- with good reason. Average student debt on graduation grew to $18,800 in 2005, up from $15,200 a decade earlier, and more than one in four borrowers -- some 27% --had debt loads of at least $25,000 by the time they finished school.

There are several ways you can help loved ones avoid the onerous costs of post-secondary education. The first option for most people should be the registered education savings plan (RESP). In fact 52% of families have already started RESP’s for their children/grandchildren.

RESPs are simple to open. Once you obtain a social insurance number for your child/grandchild and choose a plan provider, you are on your way. As a subscriber to an individual or family RESP, you control the assets inside the plan, much as you would your holdings in your RSP or TFSA.

Also, as with other registered accounts, contributions inside an RESP grow without attracting any taxes.

What is most appealing about RESPs are the government grants they attract. Over the lifetime of a plan, each child is eligible for Canada Education Savings Grant (CESG) of up to $7,200. That's calculated as 20% on the first $2,500 contribution to an RESP and allocated each calendar year, with unused annual CESG room accumulating until the end of the year in which a child turns 17.

An RESP may have a single beneficiary or, in the case of a family plan, multiple beneficiaries who are in the same family and related to the subscriber by blood or adoption. In cases when the plan beneficiary does not pursue post-secondary education, subscribers of individual and family RESPs have several options. For example, funds can be allocated to a sibling who is also part of the plan or has been added to the plan. Or, if contribution room is available, the subscriber could choose to transfer to his or her RRSP or a spousal RRSP up to $50,000 from an RESP. Even without RRSP room, the accumulated income from an RESP can be paid to the subscriber. In this case, payments are subject to regular income tax and an additional tax of 20%. This does not include grants made to the plan. Those have to be paid back to the government.

Other ways to save for your child's education If you're looking for alternatives to an RESP, you may wish to consider other savings options to provide additional flexibility and growth potential. (Government grants do not apply.)

In Trust Accounts A simple way to save for future education costs is to open a regular (non-registered) investment account as an "in trust" (informal trust) account. Two features of an "in trust" account can make it an excellent savings vehicle for a child's education:

  • Unlike RESPs, there are no restrictions on the amount you can contribute

  • Also, unlike RESPs, if the child does not pursue post-secondary education, the child may use the money for another purpose

Family Trusts / Educational Trusts A family trust or educational trust is a trust arrangement typically established by a formal trust agreement drafted by a lawyer. A formal trust allows you to specify exactly how your funds are to be invested and exactly how and when the trust will pay out to your beneficiary. There are no contribution limits, however a tax return must be filed for the trust annually. Although certain preferential tax treatment for such trusts has been eliminated in recent years, some advantages still remain.

How do other education savings options differ from RESPs?

  • Unlike Registered Education Savings Plans (RESPs), the government does not add grants to your savings. Keep that in mind as you choose how you will choose to save.

  • There are no rules about what your child does with the money when they reach legal age. They can use the money to pay for their education, but they might also decide to use it for a first home, or keep it for other purposes.

Tip: For some families, having fewer rules is a good thing. For others, it could lead to problems. Suppose your child decides to use the money in some way you don’t approve of, such as buying a new sports car instead of going to university? If this worries you, look for savings plans that offer ways to keep control of the money.

Education savings is an important component of the Northland Wealth Planning Process. If you are interested in completing your own personalized Northland Wealth Plan, please contact our office.

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