Saving for higher education pays off

21 August 2018

There are many reasons to build savings, for example to create an emergency fund, or to put aside money for a large purchase. For parents, starting to save for your child’s post secondary education as soon as possible is extremely valuable. There are many advantages to pursuing higher education. In addition to building greater resiliency in life, higher education can lead to better employment opportunities and the potential for higher incomes.1

It is even more important for families living on low incomes to take advantage of education savings, since students from low-income households tend to be under-represented in higher education participation and in education savings.23 Among less wealthy households, children with savings dedicated to higher education are more likely to attend post-secondary education than otherwise4, even if this is only a few hundred dollars.

In Canada, the Registered Education Savings Plan (RESP) is a savings tool created for just this purpose. RESPs allow your savings to be tax-sheltered while you make contributions, and also include government savings contributions through the Canada Learning Bond (CLB) and the Canada Education Savings Grant (CESG). The CLB5  and CESG6  are especially important for families living on low incomes. The CLB is specifically designed for families living on low incomes, and can contribute as much as $2,000 to your child’s RESP. The CESG is a savings grant which matches a portion of your contributions to your RESP, up to a maximum limit of $7,200. The amount of the matched contributions varies by income level.

All of this can quickly sound impressive – but also confusing. There are a lot of names and acronyms to wade through, and it involves setting up a new kind of financial account. Many major financial institutions offer no-fee RESP accounts. However, there are also group RESP plans7 offered by investment dealers, which typically have additional rules and fees associated with them, and require you to make scheduled contributions on a regular basis. The downside of this arrangement is that if you’re unable to keep up with these payments, there can be significant consequences in the form of high fees for cancelling the plan or missing payments.8

A good first step is to register for an RESP (SmartSAVER9 can help you to set up a no-fee account with a local financial institution), and make sure to ask questions like this when doing so:

  • What are the fees for opening the RESP?
  • What are the fees for withdrawing from an RESP?
  • What happens if you can’t make regular payments?
  • What happens if your child doesn’t continue their education?
  • If you have to close the account early, do you have to pay fees and penalties? 
Make sure you are comfortable with the answers before completing your RESP registration. These are good types of questions to ask when signing up for any new financial product.

Next, decide how much you are able to contribute and how often. Also, even if you’re not able to contribute funds of your own right now, you should apply for the CLB through your RESP provider, and go from there. Make sure that whatever you’re contributing to your RESP is within your budget right now. You can always change it later when your income level changes. Even small savings will add up.

  1. http://www.theomegafoundation.ca/documents/Family-Savings-for-Post-Secondary-Education.pdf 
  2. http://policyoptions.irpp.org/magazines/october-2016/a-million-canadian-kids-missing-out-on-free-education-money/
  3. https://www150.statcan.gc.ca/n1/en/pub/11-626-x/11-626-x2017071-eng.pdf?st=iT95SW3b
  4. https://prosperitynow.org/link-between-savings-and-college-success
  5. https://www.canada.ca/en/employment-social-development/services/learning-bond.html
  6. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps/canada-education-savings-programs-cesp/canada-education-savings-grant-cesg.html
  7. http://www.smartsaver.org/understanding-group-plans.shtml
  8. https://www.getsmarteraboutmoney.ca/invest/savings-plans/resps/3-types-of-resps/
  9. https://www.smartsaver.org/
Resources: 
RESP Infographic