Tuesday, July 21, 2009

Their Schooling Will Cost How Much?

Nothing warms the cockles of my heart than seeing the complete shock on the face of a new parent when they find out the cost of their child's "post secondary" schooling. Just be grateful you don't live south of the 49th parallel where costs are often five to ten times as much.

Canadian Business magazine has an interesting calculator that shows the costs associated with most universities in Canada. You simply decide where Johnny or Susie is going to school, whether they will be a doctor, lawyer or engineer and it does the rest.

The only problem is that it shows the current costs for an education and that is a huge problem for people with younger children. Here's the solution - take the results of the Cdn Biz site and then plug the "real numbers" into
Mackenzie Investments RESP calculator. You can input the number of children, where they will go to school, the costs, and inflation and come up with a very real (and terrifying number). Consider a 4 and 7 year old. Four years at school, while living at home, and with no "extras" like textbooks, school fees, sports etc and the costs are over $80,000. A law program at U of T? Double or triple that number.

If those numbers scare you, then let me point out something truly petrifying - those costs pale in comparison with the costs of not doing anything. In the first example, a child graduating from University with a $40,000 debt load can expect to pay an additional $20-$40,000 IN INTEREST ON THEIR DEBTS. I once made a statement that some people found to be quite prophetic (and others said it was pathetic so what do I know).

People who do not plan for their child's education costs are teaching them the merits of debt financing and establishing the groundwork for future financial misfortune.

In the above example, if mom and dad had set aside roughly $100-$110 per month in an individual RESP (not one of those scholarship type plans - that is a full blog in itself) from birth, it would have paid for the education in full. Don't even get me started on what happens when you wait. Simply waiting for 3-4 years means you need to contribute 20-30% more money. Contributions are not tax deductible, and the grant and growth is taxable but in the hands of the beneficiary. Since your child will likely not have sufficient income to pay taxes, essentially it's a tax free strategy. If you want to learn more about the types of RESP plans, then click on this link.

The biggest bang for the buck within an RESP is the grant monies. Essentially for every loonie you put into the plan, the government kicks in 20 cents. If your net family income is below $37,178, you get an extra $100 on the first $500 you save for each child. If your income is between $37,178 and $74,357, then they provide an extra $50 on the first $500 you save for each child. That really begins to add up. Here's an example:

Let’s say you save $650 a year for 15 years. Now let’s say your invested money will grow by 5% each year. The numbers below show you how much faster your savings would grow with the grant added in. With no grant money, after 15 years you would accumulate $15,656. With the various grant monies available, you contribute the same amount but end up with $18,790. In this case, you could get more than $3,000 for free.

There are several myths associated with RESP's. If my child doesn't go to school, I lose all of my money is the one I hear the most. In an individual plan, that is not true. You lose the grant money. As well, if you have more than one child on the plan (a family plan), then the money can be used by any of the children. Another popular myth is that you have to pay a lot of taxes on RESP's. In fact, only the grant and growth portion of the plan is taxable, and is taxed in the hands of the child. As long as their income is below $10,230 (and that is after all deductions including tuition costs etc), then they pay no taxes on the money.

Stay Well and Pay It Forward.


Johnny G said...

Good Read

Matt S. said...

Good blog post today...yikes!!!