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The Cost Of Your Children's Education
Are you hoping your children will go to university or a
technical institute someday? The total cost for a diploma/degree can be terrifying
and in the 1995/96
student budget prepared by the Canadian Federation of Students it allocates $8,890
for tuition, books, rent and food. Assuming inflation continues at 3% per year,
a four year undergraduate degree in 2015 will cost more than $67,000.
Moreover, the potential for government cutbacks and tuition costs constantly
rising means fewer loans available. Should this trend continue, many students
will not be able to afford a post secondary education. Only the wealthy, those
on scholarships and children whose parents planned ahead will be able to afford
the costs of getting a degree.
A student attending university and living away from home spent $17,000 in
1977 for a four year degree. That same education cost $33,000 in 1987, and costs
$49,000 in 1998. Forecasts are for those costs to rise to $62,000 in 2007, and
will be $75,000 in 2016, which is 18 years from now!
How To Pay For Schooling
How will you pay for your kids' education? You have three choices: you can
pay before, during or after they are in school. By taking out loans, you will
have to repay the loan after - an expensive proposition. If you pay during, you
will have to cope over a few years - not easy when you have normal living
expenses to pay. This leaves one sensible option: Begin saving now.
The best option is a Registered Education Savings Plan (RESP). An
RESP is a
government approved plan that permits earnings to compound on a tax deferred
basis. You do not gain tax deductions for your contributions like an
RRSP.
However, the earnings (capital gains, interest and dividends) grow
tax-free. When the earnings are withdrawn, the student pays the
taxes, usually at a much lower rate. The non-taxable contributions can be
returned to you at any time.
An
RESP also offers the potential to build a larger pool of savings over the
long term through a variety of investment vehicles. In the event that the
beneficiary does not go to college, university, or other qualifying
institutions, you can generally transfer the fund to another eligible full-time
student or your RRSP (if you have available contribution allowance).
Government Grants
You can contribute up to $4,000 each year to an RESP with a lifetime limit of
$42,000 for each beneficiary. As of January 1, 1998, the government will give
you a grant of 20% ($400) on the first $2,000!!!
If you make only a $95 contribution to an RESP each month and receive an
annual compounding rate of return of 10% for 18 years, you will earn about
enough money to cover one child's education (including the government's 20%
grant). In addition, it will have cost you only $20,520 (with a total government
grant of $4,100). So start now and invest regularly - it is a much cheaper way
to pay for your kids' education.
Three Reasons Why RESP's Make Sense
1. - Through Canada Education Savings Grants, the government pumps up your
contribution by 20% per year, to a yearly maximum of an extra $400.
2. - Your
investment grows tax-free until it's withdrawn.
3. - Income from the plan
eventually is taxable in your child's hands, at a time when his or her tax rate
is likely to be low - income splitting.
How Would an RESP Work For You?
The
Canada Education Savings Grant (CESG) provides RESP holders with a grant of 20%
on the first $2,000 contributed to an RESP each year for beneficiaries under the
age of 18. Grant recipients will be eligible to accumulate a lifetime grant of
$7,200, or a maximum of $400 per beneficiary per year on contributions effective
January 1, 1998. Your children must have their own
social insurance number
(SIN)
For beneficiaries aged 16 and 17, the
CESG is only applicable if there have
been RESP contributions for at least 4 years in the past, or if total previous
contributions for the children have reached $4,000.
The Government will provide the
CESG directly to the plan trustee to be
invested in the same plan chosen by the contributor. The grant itself is not
included in calculating the annual and lifetime contribution limits.
The grant is allowed to grow as part of your
RESP, and is paid to the student
upon enrollment in an eligible full-time post-secondary education or training
program. If the beneficiary does not pursue education or training, the grant (s)
must be returned to the Federal Government. Under certain conditions, however,
income generated by the grant may be transferred to the contributor's
RRSP.
Grant eligible contributions may be carried forward to future years up to a
maximum of $4,000 per year, translating into a maximum grant in any year of
$800. The CESG room accumulates from 1998 to the year in which the beneficiary
turns 17.
As for the actual monetary results, $2,000 invested each year for 15 years
equals an investment of $30,000, with a CESG grant of $6,000 ($400 per year),
and assuming an annual return of 9%, will grow to $76,250--which should cover
the costs of an education at that time, 15 years down the road!
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