Parents: University Education Will Cost $100,000 in 2025. Are You Prepared in 2010?

WalletPop Canada welcomes guest blogger Neil Jain, who explains how parents can take advantage of the under-utilized Registered Education Savings Plan program, and benefit from government grants.

By Neil Jain, President, Money Life Skills

It's back to school season! As we prepare to take our kids to their first day of daycare or kindergarten, university graduation day may seem far away. The sooner you learn about the $7,200 (or more) in grants the Federal Government is offering you as an incentive to save for your kids' post-secondary education, the more likely you are to participate in it.

Avoiding Debt Mountain

We know that post-secondary education is growing in importance because it enables higher wages and is increasingly required for many professions. But the cost of education unfortunately continues to rise faster than the rate of inflation! According to a variety of estimates, a four-year undergraduate degree will cost at least $100,000 in 2025. Although this may seem daunting to parents, the sooner you have a saving strategy in place, the less your children will need to worry about graduating with a mountain of student debt.

R-E-S-P, Find Out What it Means to Me

Despite widespread recognition of the acronym "RESP," or Registered Education Savings Plan, many parents don't know how the plan can benefit them and their children.

The RESP is a "container," similar to the RRSP and TFSA, where you can place money and shield your contributions and earnings from being taxed. You choose to invest this RESP money in to a basic savings account, GICs, mutual funds, exchange-traded funds, stocks, bonds or other qualifying investments.

How Much Money are We Talking?

If you contribute $2,500 per year per child, the government will chip in $500. That's 20% return right away! If you have unused contribution room, you can bump up your contribution to $5,000 in one year with a government grant of $1,000! If you diligently sock away $36,000 over a 14.4-year period, the government will kick in a total of $7,200 in grants. Additional grant money is provided for those with household incomes lower than $81,941 (current year numbers) and provincial grants are available in Alberta and Quebec.

The money withdrawn by your kids that is used for education will be taxed in their hands and, assuming they're not raking in lots of cash in their university-going years, they'll pay no taxes on it!

Stay in School, Kid!

Remember: the money in the RESP is strictly for post-secondary education. It can be used in Canada or abroad at a qualifying institution. However, if your child decides to not pursue university, college or an equivalent, you may need to return the grant money and pay high taxes on the earnings.

Get Started Now

My recommendation is to open an RESP with your local bank or credit union and deposit a small amount of money, perhaps $500 or $1,000. This will make you familiar with the process, the investment choices available and you'll become aware of other considerations including: who can contribute, how long you can contribute, when the money must be used and family versus individual plans.

How Do I Make it Work?

You need to consider the priority of saving in the RESP versus RRSP, TFSA and other priorities such as mortgage payments. You may also decide that you will only contribute a certain percentage to your kids' education and have them work part-time or take on some debt. This is quite alright as long as you have a strategy. Gaining the right knowledge about RESPs will help you make an informed decision and you will feel more confident as you take your kids to school this September!

Suggested resource: The Federal Government's CanLearn web site explains RESPs in a friendly manner and answers many common questions.
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Neil Jain is a Financial Consultant and Founder of Money Life Skills. Money Life Skills aims to empower people to make confident financial decisions. Our unbiased life stage seminar series and customized private consultations help save time and money with key life decisions including rent versus buy, joining finances, saving for children's education, optimizing investments, self-employment and getting established in Canada. For more information, visit www.moneylifeskills.com.