Everything You Need to Know About RESPs

If the COVID-19 pandemic has taught us anything, it’s that the future is ultimately uncertain. Without the right plan, yours and your children’s goals for higher education could end up being just a dream. With unprecedented job losses and school closures, many students are struggling to realize their educational dreams.

If you wait too long to start actively saving for your children’s post-secondary education costs, your plan could easily be derailed by something outside of your control. Out of state students have been forced to interrupt their schooling to return home, copious losses of tuition, and difficulty in finding appropriate student housing after the closure of most dorms are creating unique challenges.

With the right plan, families know they are doing everything on the financial front to provide their children with a chance to explore their post-secondary education. Recent events have become a shocking wake up call for families that have yet to start saving for their children’s education.

The average 2019 tuition costs for an undergraduate program in Canada was $6,500. This price doesn’t include costs for books, housing, food plans, or transportation. Once you factor in these necessary expenses, you are looking at close to $14,000 per year to send your child to school. Trying to finance these costs on the fly without the benefit of education savings like a Registered Education Savings Plan (RESP) can be close to impossible.

Compounding the rising tuition costs, you may need to take other aspects like a lack of student employment and on-campus housing into account. No one knows what the landscape of secondary education will look like following the end of the pandemic. Will more students choose a partially online curriculum? Or, will there be adequate housing for out-of-state students depending on the new capacity restrictions? These unknowns can drastically affect university costs moving forward in the next few years. 

Experts are predicting that students can expect an unprecedented boost in tuition costs after the devastating losses suffered by many schools during the pandemic. Class registration dropped by 40% this fall with many students reluctant to attend classes and risking a COVID-19 infection. The average rate of inflation for Canadian tuitions has hovered in the 3% range for the past decade. Following the pandemic, you may see a jump as high as 8% increases that could be hard to manage without a solid savings plan.

What Is an RESP?

In simple terms, RESPs are a dedicated savings plan for your children’s post-secondary education. RESPs give you access to government grants and allow your money to grow tax free in the plan.

You can keep your plan open for up to 36 years, giving your children the opportunity to begin their post-secondary education whenever they want or to retrain for a new career later in life. 

Why Are RESPs Important?

Starting your post-secondary education savings early is the best way to prepare for any future financial uncertainties. The current rate of inflation remains unstable and the amount of tuition could escalate quickly if you aren’t prepared for increases. When you start saving for your child’s post-secondary education early, you can also take advantage of the compounding of your primary savings. 

Taking advantage of the government grants through an RESP, can increase your savings dramatically every year. These government grants include the Canada Education Savings Grant (CESG), that matches  20% of your contributions, up to $500 a year, and to a lifetime maximum of $7,200 per child. There are also other grants such as the Canada Learning Bond that lower income families can benefit from. Additionally, some provincial governments also add matching grants to an RESP based on other factors such as age, contribution, etc. 

An RESP also allows your money to grow tax free in the plan. You won’t need to pay taxes on any money you earn from investments made within your RESP, as long as the money stays in the plan. When your child starts withdrawing money from your RESP in the form of EAPs (Educational Assistance Payments), some tax conditions apply. But since your child will likely be making little to no income, taxes will be very low.

Trying to finance higher education costs without the benefit of a dedicated savings plan could keep your child from being able to pursue their dreams. Even with scholarships, part-time job earnings, and normal savings account dividends, it can be nearly impossible to pay for several years of post-secondary education without going into debt. One of the largest concerns for students starting post-secondary, is the amount of debt they will incur over their time at school. When you invest in an RESP, you can provide the funds for your child’s tuition and save them from the stress of endless school loan payments.

It’s the responsibility of parents to ensure that their children have a solid plan for their future. Investing in a RESP remains the most viable way to ensure that your child can afford to pursue their dreams of attending post-secondary education.