Sending a child to college or university is very expensive. That’s why so many young people turn to provincial lending programs – like the Ontario Student Assistance Program (OSAP) – or banks and credit unions for help in making their tuition and rent payments.
Unfortunately, that means many young adults leave university with a substantial amount of debt – on average, about $25,000. The result of so much debt can be devastating, physically, mentally and financially.1 Excessive student debt could even prevent a young person from securing other types of loans, such as car loans or mortgages.
Using an RESP to give them a head start
A RESP could help avoid these problems. A RESP is a savings vehicle that’s built to help a parent, grandparent or other type of guardian prepare someone for the financial rigours of college or university life.
Your investment representative can show you how to establish a RESP. Once everything’s set up, you can begin contributing, with no limit on how much you add in each year.2
In addition, the first $36,000 you contribute becomes eligible for the federally funded Canada Education Savings Grant (CESG), which can provide an additional 20% savings on an annual contribution of $2,500. In other words, if you put $2,500 into an RESP each year, the federal government could add an additional $500.3
When should you open a RESP?
To receive the maximum amount of federally funded (CESG) grants, which is approximately $7,200, you need to open the RESP before your child turns 10 years of age. Keep in mind that the CESG is no longer available after a child turns age 17.
Once you open an RESP, you’ll need to decide on the types of investments used in the plan. Investment options include mutual funds and guaranteed interest certificates (GICs).
How can we begin withdrawing from an RESP?
Your child can begin using the money in their RESP once they can show that they’re officially enrolled at a post-secondary institution. The money in the plan can be used for more than tuition, too – in fact, it can be used to pay for textbooks, housing, food, transportation, even a new computer.
Keep in mind that there are different types of withdrawal regulations depending on the investments used for the RESP. To make sure you’re maximizing the amount available to your child, speak to your investment representative.
Teaching good spending habits
It’s crucial to show kids, teens and young adults the importance of saving and spending their money wisely. This becomes especially important when they start their post-secondary education.
To help your young adult make better financial decisions, it may be wise to help them establish a budget. Even better, have them speak with your investment representative about the importance of making wise choices with their money and taking care with the funds available to them through the RESP.
1 Aleksandra Sagan, “As student debt climbs to an average past $25K, schools invest in battling the mental-health issues it causes,” National Post, May 30, 2016.
2 The RESP has a lifetime maximum of $50,000 per child.
3 Canada Education Savings Grant – Overview, Government of Canada.
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Working with a financial security advisor can provide you with the tools and expertise you need to plan for the future.