It’s no surprise that a post-secondary education is expensive. We hear horror stories of graduating students saddled with thousands of dollars in student loan debt. A four-year university degree is expected to cost as much as $60,000 and that sum could rise to more than $140,000 for a child born this year, according to a BMO report. That same report found that 83 per cent of parents expect to pay for their child’s education.
A popular savings vehicle is the Registered Education Savings Plan (RESP) but parents may be losing valuable investment dollars by not managing the plan properly. You’ll probably need a combination of sources to cover the costs that includes your savings, your child’s savings, and scholarships, for example. Here are eight common errors and misconceptions about saving for a child’s education and how you can avoid them.
Not regularly reviewing your RESP. It’s easy to start a plan and automatically contribute the monthly amount but at the end, you may not have enough money. The bottom line savings amount depends on the age of your child when you started the plan.
The fix: Start saving early and check your RESP regularly, as you would any other investment, to see if you’re on track.
Not realizing the true costs of an education. Don’t get stuck thinking that costs will stay the same, or there will be enough money when the time comes. Or that your child will just get a student loan. Why saddle them with burdensome debts loads? Remember that education costs today are as high as $60,000. A typical RESP, started at the age of two, will be worth $22,000, so there will be a shortfall.
The fix: Try to figure out how much an education is going to cost and increase your monthly contribution —- even and extra $10 or $20 a month will make a difference. It might be wise to talk to a financial planner to help you devise a strategy that will work for your goals.
Not taking advantage of “free money.” Two-thirds of parents have set up RESPs for their children, but are not making the maximum contributions. The federal government will top up the plan to the tune of $500 a year to a lifetime limit of $7,200. But you have to contribute the annual maximum of $2,500.
The fix: This one’s easy. Just make the maximum contribution!
Not getting any expert advice. Saving for your child’s education means long-term planning. Some parents may not know how to do this and require some help.
The fix: Meet with a financial planner or tax professional who can help you figure what you can afford to spend on your child’s education without sacrificing your future.
Not starting to save early enough. Many parents might be thinking they have time on their side but the kids grow up fast. Parents may also believe they are not in a financial position to start a savings plan. But it’s important to realize that the more time you have the more you can save. A small something is better than a big nothing.
The fix: Start from where you’re at. The biggest benefit of starting early is you can set proper expectations. If you don’t start a RESP before the child is 15, you won’t get any grant money.
Not treating their RESP like an investment account. Because it’s a savings plan for your child’s education and it’s for a long time down the road, you might not think of it as an investment account similar to your other investment vehicles. You have room to maneuver within it.
The fix: First, discuss options with a financial planner who may suggest growth-oriented investments when the child is still young, then moving the money into more stable investments as your child gets older.
Not looking at other ways to save. The maximum contribution to an RESP is $2,500 annually. That may not be enough if your child is older when you open the plan.
The fix: Open other savings vehicles like a daily-interest savings account in the child’s name or a TFSAA. Mutual funds and other investments may be attractive. Again, talk to a financial planner.
Not knowing that you can use RESP money in different ways. An RESP can be used for apprenticeship program or for an out-of-country education. And the capital you’ve contributed can be used for any purpose, not the grants or the money earned from the grants.
The fix: Do your homework. Read the fine print. Talk to a financial planner. Put together a plan that will work for you and your children.