Financial: Saving For School

As education costs increase, so does the number of ways that parents can set aside money for university. All have their relative merits; some approaches offer greater flexibility - a key component of any financial plan.

Scholarship trust companies started education savings plans in the 1960s and virtually monopolized them until 1998. That's when the federal government introduced the Canadian Education Savings Grant (CESG) of up to $400 a year, and made plans more flexible so money set aside for a child who didn't go on in school wouldn't necessarily disappear. Banks and fund companies subsequently entered the market and the portion of RESP market share held by scholarship trusts has been steadily dropping ever since. Here are your issues when looking at your options.

Sharing the pool

Scholarship trusts differ somewhat from product to product, but normally consist of a pool of investor money that's invested in conservative securities such as government bonds and guaranteed investment certificates.

Fees associated with pooled plans can be complex and should be carefully reviewed before signing on. A typical plan will include some or all of the following: enrolment or membership fees, administration fees, investment management fees, depository fees and trustee fees. Fees are usually paid up front or within the first couple of years of contributions.

In the past, scholarship plans offered limited transferability should the child not go on to higher education. For the most part though, today's scholarship plans offer an option that allows the subscriber to get back his or her interest as well as their contributions if the child does not pursue post-secondary education. There are also provisions for scholarship funds to be used by siblings or, in some cases, other family members if they're not needed by the named beneficiary.

Alternatively, subscribers can choose the traditional group scholarship option, where interest not required for the named beneficiary's education is forfeited to the benefit of the remaining plan members. This feature means that those who do stick with a scholarship plan to maturity will generally see benefits greater than their deposits have earned.

Individual or pooled

RESPs can be set up for an individual child, there may be advantages to creating a family RESP. That way, if one child doesn't head off to college or university, a sibling can put the funds to work. The funds in the plan do not have to be shared equally by the beneficiaries. This means that if any child has educational expenses higher than another child, they could receive more income from the plan.

If no one in the family goes on past high school, then you still have a few options, including transferring the plan, after paying back the government contributions, to the parents' RRSPs - if they have the room. Or you can collapse the plan and pay the tax on the income. To take advantage of these options, the RESP must have been established at least 10 years ago, the contributor must be a Canadian citizen, and all beneficiaries must be 21 years of age or older and not pursuing a post-secondary education.

The in-trust approach

Although not necessarily the first choice anymore since they don't qualify for the CESG, in-trust accounts are still used today by some families to build up education funds. Unlike RESPs, they offer no restrictions on the amount you can contribute on either an annual or total basis. These arrangements also take advantage of the fact that, unlike ordinary income, there's no attribution for tax purposes of capital gains between a child and a parent.

In general terms, most informal in-trust accounts for children are set up with financial institutions which require that the accounts be created in the name of the settler - typically the parent - in trust for a particular child. The principal drawback is that you won't be able to prevent wayward adolescents from taking the money once they've reached age of majority.

Self-directed plans

In recent years, one of the most popular choices has been the self-directed RESP. With a self-directed RESP, you have much more flexibility. You can decide what kind of investments you want to hold with none of the potential disadvantages of a pooled RESP.

Self-directed plans also have entirely flexible investment schedules, and contributions can generally be stopped and started easily and without penalty. Costs for a self-directed plan will vary, depending on the type of investments chosen and who administers the plan.

Whatever the choice of plan, education funding is an essential issue for anyone with a family. It all depends on your circumstances and needs - something which we should discuss more fully.

Article submitted by Velma Carroll, Ten Star Financial Services.
Phone: 905.634.8834
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