With household debt swelling to record levels, student borrowing has emerged as a special concern for Canadians -- with good reason. Average student debt on graduation grew to $18,800 in 2005, up from $15,200 a decade earlier, and more than one in four borrowers -- some 27% --had debt loads of at least $25,000 by the time they finished school.
There are several ways you can help loved ones avoid the onerous costs of post-secondary education. The first option for most people should be the registered education savings plan (RESP). RESPs are simple to open. Once you obtain a social insurance number for your child and choose a plan provider, you're on your way. However, finding the RESP that suits your personal circumstances and getting the most from your plan isn't always as straightforward.Misunderstandings and complaints about scholarship trusts have spurred the Canadian Securities Administrators, representing regulators across Canada, to seek to help consumers be better informed about these plans. The CSA is asking for feedback on proposed revisions to disclosure requirements. The focus is a new disclosure form to clarify the costs and risks of group RESPs.
Notwithstanding the peculiarities of group plans, RESPs are governed by federal regulations. Offered by banks, fund companies, investment dealers and other financial-services providers, they differ greatly from the scholarship-trust version of RESPs.
For example, unlike the rigid contracts, enrolment fees and mandatory schedule of contributions of group RESPs, there's no commitment to regular contributions for a family or individual RESP. Providing greater flexibility, these plans can be set up for an individual or for multiple related beneficiaries.
As a subscriber to an individual or family RESP, you control the assets inside the plan, much as you would your holdings in your RRSP or TFSA. Also, as with other registered accounts, contributions inside an RESP grow without attracting any taxes.
What's most appealing about RESPs are the government grants they attract. Over the lifetime of a plan, each child is eligible for Canada Education Savings Grant (CESG) of up to $7,200. That's calculated as 20% on the first $2,500 contribution to an RESP and allocated each calendar year, with unused annual CESG room accumulating until the end of the year in which a child turns 17.
But even if you can't manage a contribution for your child, it may be worthwhile to open an RESP. That's because there are grants other than the CESG available to those who meet certain requirements. For families who qualify for the national child benefit, for example, the Canada Learning Bond is paid to children born in 2004 or later. That's $500 in the first year of the plan and $100 in each subsequent year -- and you don't even have to make an RESP contribution to get that money.
An RESP may have a single beneficiary or, in the case of a family plan, multiple beneficiaries who are in the same family and related to the subscriber by blood or adoption. Until recently, RESP contributions were limited to $4,000 in a year and $42,000 over a lifetime. Changes that took effect in 2007 increased the maximum lifetime-contribution amount to $50,000 and took away the annual limit.
So, you could contribute the whole $50,000 in one year if you wished to do so. However, the maximum CESG for a given year is $1,000 --$500, or 20% of $2,500, for the first $2,500, and up to $500 for one of the previous years in which there was no contribution. This means that timing your annual contributions, including spreading out deposits to make up for past years when you didn't contribute, would allow you to maximize the CESG.
Other cash incentives to save in an RESP are also available to families that qualify. These include the Canada Learning Bond which is based on family income and pays an initial $500 for children born in 2004 and later, then an additional $100 annually for up to 15 years. Alberta also offers its own provincial grant while Quebec pays a refundable tax credit to qualifying RESPs.
Individual and family RESPs also offer a fair amount of flexibility when it comes to withdrawals. Full-time students attending classes at least 10 hours per week may take out up to $5,000 in the first 13 weeks of enrolment. For part-time students, a course must require at least 12 hours each month and must span at least three consecutive weeks. Part-timers must also be at least 16 years old to qualify for up to $2,500 in withdrawals for the first 13 weeks of their program.
Furthermore, in cases when the plan beneficiary does not pursue post-secondary education, subscribers of individual and family RESPs have reasonable options. For example, changing the beneficiary is easily done when the previous and new beneficiaries are both younger than 21, and his or her parent is the parent of the original beneficiary.
Or, if contribution room is available, the subscriber could choose to transfer to his or her RRSP or a spousal RRSP up to $50,000 from an RESP. Technically known as accumulated income payments (AIPs), such amounts represent income that has been earned inside an RESP over the years.
Even without RRSP room, the accumulated income from an RESP can be paid to the subscriber. In this case, payments are subject to regular income tax and an additional tax of 20%. AIPs do not include grants made to the plan. Those have to be paid back to the government.
