RESP – Keeping It All In Perspective

by Mike Holman

This post is part of the Big RESP Series. See the entire series here.

See the previous post on How To Get Started.

Since the government started giving grants for RESP contributions in 1998, the RESP program has become quite well known and has become a new source of stress for new parents. I know a lot of friends who have set up RESPs for their kids which is great since most of my friends are older parents and have reasonably good finances. For someone who is younger and/or doesn’t have great finances, RESPs should probably be a lower priority to things like lowering debt and saving for retirement. It’s important to make sure your own finances are in good shape before saving for a future expense when you don’t know how much that future expense will be or if it will even occur. There is no point in making RESP contributions and then later on you have to withdraw the money to pay for the mortgage.

Try not to listen to the hype from investment companies – the same people who write the ads that try to scare you into investing with their company (you need 70+% of your income to retire or you will be living in a cardboard box) also create the ads for RESPs. Investment companies often come up with fairly “worst case” scenarios for their projections of how much post secondary education will cost in 18 years or so. They try to make it sound like your child’s education will cost a certain large amount and if you don’t have that much saved up when they finish high school then they won’t be able to go on to post secondary school.

The reality is that most parents (hopefully not me) are still working when their kids go to school so they always have the option of diverting some of their income to make up any shortfall. The investment company ads also don’t seem to include the fact that most students work during summers and can offset a portion of their schooling that way. The last point I want to mention here is that like most things in life, post-secondary education involves choices that cost more or less money. If a student can live at home and go to school, that is much cheaper than going to school in a different city. The student may not like that choice but sometimes money (or lack of) can help simplify the decision making. Other factors that I can think of are housing – do they live in a dorm, shared accommodation or their own apartment? Do they have a car? All these choices will play a significant role in the amount of money required for the students education.

Summary

RESPs are a good thing but they are not as important as your family finances. You are not doing the child any favours by maxing out the RESP grants but they can’t participate in some activites because you don’t have enough money.

Establish your family finances first, then worry about the RESPs. You can carry forward the contribution room so there is no rush to start the account as soon as the child is born.

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{ 16 comments… read them below or add one }

1 Traciatim

Maybe people should just lower their expectations and realize that their kids are going to be working in sweatshops when they get older and they will be living out of boxes eating scraps.

Since the only real way to people to act is to scare the crap out of them (it sucks, but it’s reality). If you tell them they need to put 500 bucks a month away for 18 years and they reach only half their goal then you’ve done your job. Their kids will be better off than the kids next door that didn’t plan ahead. Their retirement will be better than probably 75% of the other people if they reach only half of the 70% goal. What’s the harm in that?

I’m putting enough away in an RESP for each of my kids that hopefully I’ll pay for about half of their schooling. They are 6 and 2 right now. I had to pay for it all through student loans, so hopefully they will be a few steps ahead of my situation.

My main plan is to try and talk them in to not going to university directly out of high school. I would like them to work for 2 years and save most of the money they make, I want them to work before school so they learn what work is and how much better school and a cushy job is in comparison. That’s many years away, so we will see how things change between now and then.

2 FourPillars

Thanks for the comment TraciaTim:

Unfortunately, you might be right about the need to scare people. My point is that if your financial position is not very strong, there’s not much point in having an resp if you end up raiding it to pay the mortgage later on. I think financial planning has to look at every aspect of your finances and evaluate which areas have the highest priority and which ones can wait.

Interesting plan about getting them to work for a couple of years before college – the opposite to most parents (especially mine).

Mike

3 Mr. Cheap

Traciatim: Often that plan backfires. Once the kid starts getting a salary, they aren’t interested in going back to being a starving student for 4 years, even if it will (eventually) lead to “easier” work and a higher salary.

4 years seems a lot longer when your 20 then it does later in life…

4 FourPillars

I would think a potential problem is that the kid might forget a lot of what they learned in their last year of high school over a couple of years.

Mike

5 Pablito

Traciatim: I think I’m with Mr. C on this one. I think “momentum” could well play a role here. Getting back into the habit of studying is harder to do once you’ve stopped for any significant amount of time even more so if you’re giving up a regular salary. That isn’t to say that it can’t be done, but I’d worry about doing such a thing if the child turns out to be the type that just doesn’t care much for school in the first place.

6 Rob

I have provided my parents with my 3 children sin# and birth certificate to open up resp for them.

They have opened up three resp for them.

My concern is that we no longer get along and i dont be believe they will give the cesg money to the kids when they eventually start college.

In the meantime i have opened up a family resp plan for them. I need the cesg space to maximize my contributions every year.

I am worried that my parents are using up all the cesg grant room with their contributions that my kids may never see. I have no idea how much they are contributing at this time if anything. What can i do about this?

Thanks

7 Mike Holman

@Rob – I’m posting the answer to your question on Monday.

8 Donna

I don’t think that I have ever seen any discussion on how to factor the Canada Student Loan program into RESP decisions. I know that the provincial variations in available grants would have to be factored into any calculations but I think that it is information that parents should have available to them when they are making financial decisions.

For, example,

Is it possible that a student, who has a parent with average income, could profit just as much from the provincial and federal grants available when they apply for student loans as they would have if they had an RESP that had reaped the maximium CESGs? How about a student with low income parents?

What strategies are there for maximizing student loan grants when one does have an RESP? Withdraw all the EAP in the first year (spread over two tax years) and then apply for student loans in all the subsequent years?

I understand that all RESP withdrawals payable to the student are to be entered as parental contribution when a student is applying for a student loan. Does this also apply to withdrawals that may be made in the 6 month period after graduation? If not would it be a good strategy to have only small EAP withdrawals (that don’t jeopardize student loan grants) during the years of education and then sometime in the 6 months after graduation withdraw the balance and pay off the student loans? There might be tax implications for the student but might they be more than offset by the student loan grants that the student had received?

9 Mike Holman

Hi Donna – I haven’t seen much written about that topic either. I can tell you that out of at least 1,000 comments and emails I’ve gotten about RESPs, I think you are only the second person to mention student loans & RESPs.

I suspect that most people with RESPs aren’t eligible for student grants which would explain the lack of interest in the topic.

If you are interesting in researching and writing an article on the topic, I’d be happy to post it.

10 Donna

Thanks Mike,

I think that people who are wrestling with whether they should make RESP contributions, or do other things like pay down a mortgage, should know a bit about how RESP might affect future student loan grants but I haven’t found any information about this. I believe that *some* students might obtain more grant money, through the student loan program, if they have no RESP than they would obtain CESG and student loan grants if they have an RESP. I thought that you might have covered it in the book.

Here is the little bit that I do know. Federal student loan grants for low and medium income families are based 100% on family income (parental income) from the previous tax year. They would not be affected by RESP withdrawals. Provincial grants could be affected, where they are simply calculated on a % of eligible student loan. It is hard for a parent to do the calculations in advance because the provinces do not provide the formulas they use to assess student loan need. (When they apply the student provides a lot of numbers but it isn’t clear how they are used.) Some provinces provide their students with substantially more generous student grants and it is in these cases that having large RESP withdrawals could have a bigger impact on student loan grants.

I have previously tried asking Canada Student Loans some very general questions but they always reply that they need the student’s file number before they can answer. And obviously I don’t have a file number for a hypothetical future student. At this point what I would most like to know, and perhaps what Canada Student Loan would tell a journalist/ author, is whether it would be kosher for a student to make minimal EAP withdrawals (parental contributions) during their years of education and then to withdraw the rest after graduation.

Here is what I have figured out. With today’s available tax deductions for a student EAPs do not trigger income tax until the withdrawals push the students income above about $15,000 in a year that they have 4 months of classes or about $20,000 in a year that they have 8 months of classes. (The $20,000 will go up each year if the student has large education credits to carry forward from year to year.)

11 Istvan

I have called the OSAP ministry office to inquire about the RESP principal withdrawals. I was told verbally (no official policy document seems to exist) that RESP Principal withdrawals and TFSA withdrawals although not taxable, should be included in parents’ income in line 850 of the OSAP application. This would mean for some parents a reduction of OSAP and a reduction of the non-repayable grants by 15-30% which is basically a tax. This kills any advantages that RESP’s have. I deeply regret I have ever put any money into it…This information was never available on any government publication.

12 Istvan

To Donna:
Please search Google for “2007-2008 OSAP manual” and you can find an older pdf copy posted at a student website.. It is deplorable that the ministry does not post the up to date manual accessible on their website. The Aid estimator on the OSAP website can be terribly wrong for RESP withdrawals.

13 Robert

Just a couple questions. 1) If the Govn’t will give you 20% of $2500, would it reason that you should only put $2500 in a year… why put more if your not getting the perks… and why put less if your not maximizing your kick back… so would a good strategy be to contribute $2500 a year?

Secondly, how do you get your 500$ a year…. up to $7200.. does the goven’t deposit it in your RESP account or do you get the money back in your taxes? when you claim it?

14 Mike Holman

@Robert – I don’t recommend putting money into an RESP if it won’t get any grant money.

The grant money will be deposited into your account.

15 Saving Mom

Donna — I’m SO happy I finally found someone asking about RESPs and student loans! I can’t understand why more people don’t look into this!

I started investing in my children’s education with an RESP but then I went back to school myself as a mature student at age 35. After receiving OSAP (student loan in Ontario, Canada) myself and finding out more about it, I stopped contributing to any RESPs.

There is an OSAP program called the Ontario Student Opportunity Grants (OSOG) (formerly known as the “Loan Forgiveness Program”. “As of 2010-2011, any amount over $7,300 per two-term academic year ($10,950 per three-term academic year) is FORGIVEN for full-time students.”

I’m not great at finances, but I know that this means that no matter how much a child receives in OSAP per year, the most they will have to pay back is $7300 per year (a Sept. to April, 2-term typical university year is considered a “year”). Undergraduate tuition for most full-time undergraduate university students in Ontario, as far as I know, is over $5000, plus other fees, which adds up to about $6500. So if a child receives the maximum OSAP of about $12,500 per year (2 terms) for full-time single students with no dependents, they only have to pay back $7300 of that once they start working and making enough money, so they automatically get almost a $5000 grant (“free” money) PER YEAR (so, for 4 years of university, that’s a $20,000 grant!)

I don’t know enough about RESPs to know how they affect OSAP, but I’m assuming (and maybe I’m not totally right!) that if a parent has $20,000 in RESPs for a child, if they use $5000/year, that child will be eligible for $5000 less per year in student loans (in Ontario, with OSAP at least) — so instead of getting the $5000/year of grants, they are using the $5000/year invested by their parents; so the maybe lower-income parents worked hard to save enough for $20,000 in RESPs — but if they didn’t invest a penny, there would STILL be $20,000 there for their children in the end! Isn’t that right?

Again, I don’t know much about finances/investing, so I’m not sure about my logic by any means, but to me it seems as if parents (at least, lower-income parents) should invest money in something else other than RESPs, let their children get OSAP, and then, once the children are done post-secondary education and they get part of the loan forgiven, the parents can use their investments (in tax-free savings accounts or wherever they invested) to pay their children’s OSAP off if they want to pay for their children’s education.

If this logic is correct, this would by why the Canadian government is encouraging families, especially lower-income families, to invest in RESPs — because the government will have to give them less in student loans, and they’ll come out ahead, even after topping up the RESPs.

Besides this, there are many other grants that students can get with decent grades (or volunteer work, or a number of other things).

(I personally disagree with the “lack of momentum” if waiting a couple (or more) years after high school before moving on to post-secondary education; the gains in maturity will make up for this, as I’ve found out. I’ve heard from many people (professors, university administrators, etc.) that “mature” students (more than 4 yrs out of high school) are more serious about school and get better marks. So, waiting a couple of years could be a good idea. And if a child waits about 4 years, their parents’ income won’t be taken into consideration when calculating OSAP (Ontario student loan program), so they may get more OSAP (but will still only have to pay back the $7300/year at most).

And also — the comment about not wanting to give up a “regular salary” to go to school doesn’t make sense to me, because how much money can a person make straight out of high school with no other education? If it were my child working straight out of high school while living at home, I wouldn’t allow them to use their entire income to do as they please, as spending money; I’d ask them to pay a small amount for “room and board” (ex: $400/month) and I’d put that amount towards their future education. Or, if they lived on their own, they’d barely have any spending money if they made minimum wage, so going back to school wouldn’t be a big change of income.)

To me, it seems that RESPs might be a good idea for higher-income families, whose children won’t qualify for OSAP; but, taking OSAP/grants into consideration, RESPs for lower and middle-income families don’t seem like a good idea.

And OSAP loans interest rates are only prime plus about 1.5%, so that doesn’t seem bad to me — especially if lower-income families can keep their credit card debt down from now until the kids are done school (rather than relying on credit cards, but investing in RESPS) — it doesn’t make sense to me to have credit card debt and save for RESPs to avoid the small interest that OSAP will bring in the future.

Does all of this logic make sense or am I way off?

Personally — I’m a single parent with two children. My plan (unless I find out more and my opinion about RESPs changes!) is to encourage my children to do well in school so they qualify for extra grants (free money), have them go to school while living at home, and pay for part of their schooling themselves (maybe by taking a year off). I’m not happy that I’ll be saddled with student loans for many years to come, so I’d like to help them out; but once I myself am done school (next year), I’m going to invest in something other than RESPs, and use that money to help them pay some OSAP debt they may have when graduating.

For my family, the worst case scenario seems to be that they’ll have to pay their entire OSAP back themselves when they’re done school (about $29,200 for 4 years of university, maximum (at $7300/year max)) — but OSAP is only payable if/when they find a job, AND the amount they pay per month is calculated based on their income, so they won’t get stuck paying something they can’t afford. And, even if (worst case) I can’t afford to invest anything before they go to school, hopefully my finances will change (ex: salary increase, mortgage paid off, inheritance from my parents) and I’ll be able to help them out at some point with part of the repayment.

16 Tony

About Ontario Student Opportunity Grant and RESP. For RESP, you can withdraw all the money in the first year. Although you might not get Ontario Student Opportunity Grant for the first year, you should get that for the remaining 3 years. So you may lose $5000 Ontario Student Opportunity Grant for a year, but you get $7200 CESG and all the interests, dividend, and capital gain on that $7200.

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