Smart ways to save for your child’s education

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If you’re a parent, the start of the new school year may have you considering how much you’re able to set aside for your child’s college fund.

Average tuition for full-time undergraduate programs in the 2021-22 academic year was $6,693 in tuition fees, an increase of 1.7% over the previous year, while annual tuition for graduate programs rose to $7,742.1 So, the sooner you start saving to support your child’s future, the better.

Fortunately, Registered Education Savings Plans (RESPs) and other assistance programs can help parents maximize their college savings potential.

Registered Education Savings Plans

An RESP is a government-sponsored investment strategy that allows parents to begin saving for their child’s post-secondary education from birth. A parent subscribing to an RESP can make regular contributions to the fund and build up tax-free earnings to support their child’s future educational expenses. Friends and family members can contribute as well. The Canadian government itself will contribute to the RESP in the form of a Canada Education Service Grant until the beneficiary reaches age 18.

Contributions grow tax-deferred, and withdrawals are taxed to the child, who will pay little to no taxes on them as a student.

There are multiple types of RESPs, including individual, family, and group RESPs. Individual RESPs are created with a single beneficiary in mind, while a family RESP can support any relative of the subscriber. The more complicated group plans carry different restrictions and fee structures but allow a group of subscribers to pool resources for a group of beneficiaries who do not necessarily need to be related by blood.

While contributions are not tax-deductible, funds are disbursed to the student tax-free for educational expenses in the form of educational assistance payments. If the beneficiary does not attend post-secondary education, the RESP subscriber will receive their contributions back without a tax penalty. Subscribers may also receive the interest earnings provided certain qualifications are met —for instance, the RESP must have been active 10 years and the non-attending beneficiary must be over the age of 21.  

Canada Education Savings Grants

Canada Education Savings Grants (CESGs) are available to anyone with an RESP and provide an additional 20% of annual RESP contributions up to an annual maximum of $500 and a lifetime limit of $7,200. CESG funds can be used to pay tuition for students enrolled in a range of post-secondary education programs, including universities, colleges, trade schools, or apprenticeships.

To receive a CESG, RESP account holders mustapply. Lower-income families may be eligible for an Additional CESG, which can provide additional funds to the RESP each year. Rates for the Additional CESG vary each year, so it’s wise tocheck with the government’s site each year.

Canada Learning Bonds

TheCanada Learning Bond (CLB) can provide up to $2,000 for each eligible child’s RESP. Families earning below a certain threshold may apply. Once approved, a CLB will provide $500 to a recipient’s RESP in the first year, and $100 per year for each year that child remains eligible.

As with other government RESP contributions, if the child does not elect to go on to post-secondary education and the RESP is closed, the CLB will be returned to the Canadian government.

Provincial education savings incentives

Certain provinces, including British Columbia and Saskatchewan, offer additional RESP assistance. Theseprovincial education savings incentives carry additional eligibility requirements and applications but can help families set aside more money each year. 

Savings accounts

More traditional investment vehicles, including Tax-Free Savings Accounts (TFSAs), can be used to cover college expenses. This option provides greater flexibility since spending is not restricted to education expenses and withdrawals can be made at any time.

There is an annual limit to the amount you can contribute to a TFSA — in 2022, for instance, the limit is $6,000. While deposits in TFSAs are not tax-deductible, those funds can grow tax-free.

Your financial advisor can help you choose the most effective option for your family. Start saving for your child’s college as soon as you can to take advantage of the power of compounding returns and continue to make regular contributions as your child grows.

 

1 Statistics Canada, “Tuition fees for degree programs, 2021/2022”

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