Start saving early for your kids’ education and get them to contribute

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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

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Those with offspring in university and other post-secondary institutions know that supporting your child’s education can cost a small fortune, at least $25,000 to $30,000 to get through four years of an undergraduate degree for tuition alone.

“Of course, if they live in residence with food plans and travel expenses, that could (run) $100,000 in today’s dollars, so it’s not cheap,” Jamie Golombek, managing director, Tax and Estate Planning at Canadian Imperial Bank of Commerce, said.

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Now do the math with multiple children and the costs can be astounding.

In preparing for this major financial outlay, Golombek advises parents and/or grandparents to start setting aside money into a registered education savings plan (RESP) as soon as a child’s birth if possible. With the government providing a 20-per-cent match on up to $2,500 contributed annually per child, he said it’s a no-brainer.

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“If they can afford to do the maximum deposit ($50,000 per lifetime per child) or at least contribute per child every year, that should be a priority,” he said. “We’re even telling parents to prioritize that over retirement savings, (because) what kind of possible RSP investment could top a 20-per-cent guaranteed return on your contribution?”

We’re even telling parents to prioritize that over retirement savings

Jamie Golombek

Starting early enough also gives parents the benefit of compounding funds over long periods of time. Grant Rasmussen, managing director at Simplii Financial, the direct banking division of CIBC, said investing in a family RESP for his three children over 30 years has enabled him to save enough to support all their educational pursuits.

“When you have long-term compounding, there’s an ability to take out the market ups and downs,” he said. “Over 21 to 30 years … it’s the compounding that’s going to start to massively outweigh what you’re contributing.”

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On the flip side, if you start too late, investing in RESPs is probably not the best choice, because there are restrictions around contributions after the age of 15. At 17 and 18, beneficiaries need to have had a minimum of $2,000 contributed to their RESP (and not withdrawn from it) before the end of the calendar year they turned 15.

Parents should also familiarize themselves with the various types of RESPs available to determine if an individual, family or group plan is best. An individual RESP can be opened by anyone, but only parents and grandparents can open a family one. A family plan will also expire 31 years after it’s opened, which can be tricky if there is a large age gap between siblings.

Minimizing risk is also important as the university years draw closer, especially in today’s more volatile markets. Golombek, who has been maximizing contributions for each of his three children, said he moved his eldest child’s funds to a guaranteed investment certificate when she turned 14 to minimize any market risk.

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The whole point is to have money for education … not to get the greatest rate of return in the history of the world

Jamie Golombek

“The whole point is to have money for education … not to get the greatest rate of return in the history of the world,” he said.

Besides your own investing, consider how your kids can contribute to education costs. Steering kids towards their own savings plan is a way they can learn to contribute to their education early on, Rasmussen said. That means they could be experienced to track expenses and think about how to manage their money better by the time university rolls around.

“There are a lot of incentives out there for students to learn about banking because, as banks, we’re all trying to figure out how to get these new clients for the next 70 years,” he said, pointing out that Simplii Financial and others offer no-fee banking as well as other services that appeal to younger people.

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For those parents currently struggling with debt or falling back on retirement savings to make ends meet, experts advise against over-extending even further for post-secondary expenses.

Stephanie Wolfe, founder and chief executive of Waterloo, Ont.-based Wolfe Collective Health Inc., said parents struggling with debt or trying to save for the future still need to look after themselves first and foremost.

With 30 per cent of her clients being single mothers, she said there’s often a lot of guilt around not being able to provide financial support for their kids’ post-secondary education, but “you’ve got to put on your own oxygen mask first.”

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With part-time jobs, low-interest student loans and government scholarships to tap into, Wolfe said there are ways for kids to help carry the load of post-secondary schooling without parents putting themselves in additional debt.

“Maybe you can help pay off their student loans in the future or cover the costs of books and other (smaller) expenses now,” she said. “And think about grandparents who can contribute to RESPs or other education funding for the future to help.”

Barrie Choi, a Toronto-based personal finance expert, said there are also many, often untapped bursaries available to post-secondary students who put in the work to find them.

“This might be an unpopular opinion, but sometimes parents focus too much on saving for their child’s education,” he said. “Remember that your kids will still have 30-40 years of work ahead of them, so don’t put your own retirement plans at risk.”

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