RESPs — How will your Child Escape Student Loans?
Posted by Brad Speniel | May 23, 2015 at 8:50 am
ESTIMATED READING TIME: 2 minutes
Since it’s back to school month, I thought it would be timely to talk about your kid’s college fund and student loans. According to MoneySense magazine, experts forecast that the cost of a four-year university education in Canada, including tuition and accommodation, will run upwards of $100,000 by the time today’s toddlers graduate from high school.
But if you start planning while your kids are young, the costs of education can be affordable. Plus, you’ll save them from being burdened with thousands of dollars in student loan debt! Here are some ways to start.
Registered Education Savings Plan
A Registered Education Savings Plan (RESP) is an excellent place to start. You can contribute up to $4,000 a year per child, to a lifetime maximum of $42,000. You don’t get a tax break for the money you put in, but the funds grow tax-free. Since withdrawals belong to the student, they’re also effectively tax-free since any tax owing is offset by the student’s education credit and personal tax credit.
Self-directed or Group Plans?
There are two types of RESPs: self-directed and group plans. Group plans are pooled investments that involve regular monthly payments to a company that manages your funds and guarantees your principal. But self-directed RESPs are generally considered to be a better investment because they offer greater flexibility and lower fees. They’re available at most Canadian financial institutions, and you can choose to invest in mutual funds, stocks, bonds or GICs.
And the best part?
The best thing about an RESP is that it qualifies for the Canada Education Savings Grant that gives you 20¢ for every dollar you contribute up to $2,000 a year per child. So even if your investments perform badly, you’re guaranteed a 20% return on your first $2,000 per
Your mortgage can also help fund your child’s education. You can free up money for your yearly RESP contribution by taking advantage of many mortgage lenders’ “skip a payment” feature. Or when the time comes, you can do an equity take out to cover tuition fees so you end up paying affordable mortgage rates instead of expensive consumer loan rates. For more tips on how to use your mortgage strategically, or for a list of our recommended RESP providers, talk to your mortgage broker.