As summer comes to an end and the school year begins, thousands of new high school graduates will begin their courses at Canada’s many colleges and universities. These eager students have agreed to shoulder the costs of post-secondary education in the expectation of improved future earnings potential. But what are the costs they face?
Increasing tuition costs are only a portion of the overall expense. For students moving away from home, residence fees can be an even greater cost. Books, technology, and transportation only add to the expenses of attending school. Our recent analysis has put the total cost of education for a typical student at more than $17,000 per year.
The expense is commonly considered an excellent investment. Lifetime earnings for a student attaining a Bachelor’s degree are on average $375,000 greater than for a student with a college certificate. College graduates out-earn students who settle for a high school diploma by more than $200,000.
Since continuing education after high school is expected to have a meaningful impact on a person’s life, parents, guardians, and other relations often help cover the costs of college or university for young students. In Canada, a key means of funding education costs is through Establishing a Registered Education Savings Plan (RESP). An RESP is a tax-deferred savings plan specifically designed to save for a beneficiary’s post-secondary education. A plan can be opened as soon as a newborn beneficiary is assigned a Social Insurance Number. In addition to the tax advantages of an RESP, annual savings are eligible for a 20% match through the Canada Education Savings Grant, up to a maximum of $500 per year and $7,200 lifetime per beneficiary (low income families can qualify for an additional amount). The lifetime maximum contribution per beneficiary is $50,000.
The tax-deferred nature of an RESP means that growth, dividends, and other income are not taxed as they are earned. When funds are eventually withdrawn to pay for education costs, plan growth is normally taxed to the beneficiary, who would likely be in a low income-tax bracket. The original contributions, or principal, would be withdrawn tax-free.
We recommend that you consult your investment advisor to discuss the details of an RESP. You should consider opening a Family Plan that has the option to include multiple beneficiaries in a single RESP, and then formulate a savings plan that works best for you.