The future cost of higher learning

The cost of a college or university education is continuing to rise and thereby creating more pressure on students and parents to set money aside for the day they graduate from high school.  Here are some stats you should know:

1. The average cost of tuition in Canada has more than tripled over the last 20 years. 
   
2. Statistics from Statistics Canada shows tuition fees for undergraduate students at $4,917 for the 2009-2010 academic year.  This is three times more than the tuition cost average of $1,464 in 1990-1991.
   
3. Finally, future costs namely 18 years out will be in the neighbourhood of $85,734 for a 4 year programme where the student stays at home and $136,186 if you add room and board¹.

The question now becomes, where will this money come from?  In Canada, CRA created the Registered Education Savings Plan (“RESP”).  A RESP differs from a Registered Retirement Savings Plan (“RRSP”) in that contributions made to a RESP are not tax deductible.  They are however eligible to receive a minimum 20% government grant through the Canada Education Savings Grant (“CESG”). All investment income grows and accumulates tax-free.  Here are the rules:

1. To open a RESP and be eligible for the CESG, the child must be a Canadian resident and have a valid Social Insurance Number (“SIN”).  Plans may be opened without a SIN, however they cannot be registered or receive CESG until a SIN is obtained.
   
2. Lifetime contribution is capped at $50,000
3. RESP contributions are not tax deductible
4. Each child can accrue $2,500 in “grant-eligible” contribution room each year starting in 2007.  Previously only $2000 of “grant-eligible” contribution room is accrued.
5. Contributions receive the following CESG:
   
   

Canada Education Savings Grant:

• The basic Canada Education Savings Grant (CESG) is 20% of the first $2,500 contributed to an RESP each year (maximum $500 per year).
• The maximum CESG over the lifetime of the plan is $7,200.

Enhanced Canada Education Savings Grant:

• If your annual family income is $42,707 or less, you would be eligible to receive 40% CESG on the first $500 contributed to an RESP.
• If your annual family income is greater than $42,707 but not exceeding $85,414 you would be eligible to receive 30% CESG on the first $500 contributed to an RESP.
  

Canada Learning Bond : (For Children Born After December 31, 2003)

• Receive $500 in the first year for families entitled to receive the National Child Benefit Supplement and $100 per year in any subsequent year of entitlement up to and including the year the child turns 15 years of age.

Alberta Centennial Education Savings Plan (For Alberta Residents):

• You are eligible to receive a $500 one-time contribution for children born in 2005 or later and $100 for eligible children at ages 8, 11 and 14.

Quebec Education Savings Incentive (For Quebec Residents:

• The basic Quebec Education Savings Incentive (QESI) is 10% of the first $2,500 contributed to an RESP each year (maximum $250 per year).
• The maximum QESI over the lifetime of the plan is $3,600
• If your annual family income is $40,100 or less, you would be eligible to receive an additional 10% QESI on the first $500 contributed to an RESP.
• If your annual family income is greater than $40,100 but not exceeding $80,200 you would be eligible to receive an additional 5% QESI on the first $500 contributed to an RESP.

6. There are age restrictions with CESG.  Contributions made after the year in which the child turns 17 are not CESG eligible.  Also, for the years when the child is 16 or 17, CESG payments are dependent upon the following:
   
   (a) A minimum of $2,000 in RESP contributions must have been made before the year in which the child turns 16; or
   
   (b) A minimum of $100 in annual RESP contributions must have been made in any 4 years before the year the child turns 16.

¹ Forum – the Magazine for Financial Advisors October, 2010

These are the rules that all Canadians must adhere to when opening a RESP. The Children's Education Trust sole mandate of providing financial assistance to Beneficiaries in order to encourage and promote the advancement of higher education.

It is very important to distinguish that there are two “types” of money in a RESP account: principal contributions and accumulated income.  The principal contributions are the deposits made by the subscriber while the accumulated income is comprised of the investment income on deposits (including attrition), top-up, CESG, income on CESG and discretionary return of enrollment fee.