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To RESP or Not: Should we be funding our children’s higher education?


Brendan wrote an interesting comment in the post on Radically Frugal which got me thinking.

What’s with the RESP thing? What happened to kids getting a summer job and paying their own way? Don’t do it, and use the money to enjoy life with your kids before you die, or end up crippled in a care home. A side benefit is your kid would appreciate having to earn his own, an not end up one of these “millennium” babies, having no pride, or work ethic, etc. I know many will disagree, but that is the price of being right.

Seriously, has anyone else noticed the uprising of the “entitled” one entering the workforce?

Google “CBS here come the millennials”, 60 minutes segment that nails our up and coming youth to a tee. And it all starts with the RESP.

There are huge advantages to using RESPs, two of the most significant being:

  1. Tax Free Growth
  2. A government grant of 20% up to $500 per year per child. That’s a pretty good return!

RESPs are a fantastic savings tool for post secondary education. The question I hadn’t considered until now is, should we be saving for our children’s higher education?

I went to school with a guy name Colin whose parents paid for everything. He took 7 years to graduate with a 4 year degree and spent much of that time partying. Heather, on the other hand, whose parents split every school expense with her right down the middle, worked her tail off at university and graduated with top honours. Brian, my husband, took 4 years off after high school and worked as a custodian at a high school making $26,000 / yr back in the late 1980s. He saved up for university and paid for the whole thing with cash. He’s now working on his PhD and has never had a student loan or any help from his family. My parents paid for my first year. After that I worked my way through.

Is there a pattern here or is it a coincidence that the kids who paid their own way worked harder than the kids whose parents paid? Surely there are examples of highly successful people who had their way paid through university. What about all those wildly successful wealthy individuals with trust funds who’ve never had to pay?

We all want what is best for our kids. I’d love for my kids to graduate debt free but I’d also like for them to value their education. One of the best ways of giving value to something is to have them pay for it themselves.

As parents, our first financial goal should be to live in such a way that our children never have to support us. It’s not a wise idea to save for your kid’s university years at the expense of your own retirement savings.

In truth, up until now, if we’d had more money we would have saved more in their RESPs. Every month since they were a few months old we’ve put $100 each into their RESPs. Over time it’s added up but it’s no where near what they’re going to need for higher education in Canada, even if they live at home! Our hope is that it will cover 1/4 to 1/2 their costs and they will have to pay for the rest. We also hope that by paying for part of their higher education with their own hard earned money, they’ll value it more and work harder while they’re there.

At this point I think we may abandon our plans contribute higher amounts to their RESPs as our income increases. We need to focus on maxing out our TFSAs and RRSPs first. After that, if there is some left we may consider adding to their RESPs but will remind ourselves that if we want what’s best for our kids the best gifts we can give them include financially secure parents and the value of a good education.

Should parents be funding their children’s higher education costs if they can afford it? What are your thoughts?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

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About the author: Kathryn has been a staff writer for MDJ since January 2009. During the day she works in an office. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Kathryn, along with her husband and two children live in Ontario.

{ 57 comments… add one }

  • cannon_fodder October 26, 2009, 12:32 pm

    Stephen R,

    And, if your child(ren) don’t require the money for furthering their education, you can take back all of your contributions tax free and transfer your earnings to your RRSP. I’m guessing that you end up losing out, though – if you kept the earnings you would have to pay tax plus a 20% penalty. If you contribute the earnings to an RRSP you probably don’t get a tax refund on the transfer since it won’t be counted as a contribution although it will count against your contribution limits.

  • Stephen R October 26, 2009, 12:41 pm

    The 20% penalty is to account for the 20% contribution the government makes, so the only real downside is the fact that any earnings will be taxed as regular income if I can’t contribute them to an RSP. The money still grows tax-free, though, so it’s not so bad at all.

    That’s assuming I keep my maximum contribution to $2500/year to get the maximum matching contribution of $500/year.

  • FrugalGreenie January 2, 2010, 1:30 pm

    Free money from the government…hmmm sounds like a good idea to me. I don’t see this happening in a lot of other investment vehicles. Leaving options open for my child also seems like a good idea. My goal is to leave options open for the child he or she doesn’t need to necessary know how much money is available for their schooling. I myself self funded my entire university on scholarships despite my parents having set aside money for my tuition. When I didn’t need it they moved it to another investment option. (At that time RESPs didn’t exist.)

  • Cesar_G February 18, 2010, 5:07 pm

    HI All,

    Anyone can help me? I have opened a TD Waterhouse self directed RESP and decide to transfer the balance from my current TD RESP to TDW.

    I was told by the TD representative that transfer can be possible but I have to pay back to Government all the grants that I have received!! (About $1,1K).

    Anyone of you have had a similar situation??

    Any suggestion?
    Thanks.

  • Ed Rempel February 28, 2010, 1:43 am

    Hi Cesar,

    Sounds wrong. You can transfer an RESP to another provider and keep the CESG.

    Are they referring to the CESG, or other grants?

    There are actually 4 different grants you can qualify for. The CESG is only one of the 4. Not all RESP providers are registered to work with all 4 grants. If you transfer to one that does not have offer a grant, then you will lose the amount you already received of that grant. All providers will work with the CESG, though.

    Your case sounds very strange, since you are only transferring it within TD. They are actually separate institutions, but you would think that both would be registered for the same grants.

    It is possible that hardly anyone does a self-directed RESP and the costs of being registered for all all the grants is too high. That is the reason given by institutions that are not registered for all 4 grant programs.

    Ed

  • Cleatus June 28, 2011, 12:11 pm

    In Ontario we receive a Child Care Benefit of $100 per child per month. I think it would be selfish of any parent to use this money for anything other than saving for their children’s education.

    I deposit this money (I have two children) every month into their RESP account. With the CESG and the interest there will be lots of growth over the 17 years from the time they are born until they go to college/university to help them with their secondary education costs.

    I think it is unimaginable to allow your child to leave college with considerable debt. While I agree that they should also work a part time job to understand and appreciate what hard work is all about, I think assisting them based on their accomplishments in school is definitely something each parent should do.

    I went to college, paid for everything myself, however I had a great summer job that paid me $15K a year that my father helped me get. I do not have that luxury for my children and therefore have decided to assist them with RESP’s.

    Now I am not just giving them all of the money straight up. They must earn it. And they probably are not getting all of the RESP money either. Just the CESG and interest. The rest will go into my TFSA and or RRSP depending on my situation farther down the road when in 14 years they are both in college/university and I am 47.

    To each their own, however again I feel it is almost ignorant to think that in 15 years the costs of secondary education will not be almost double or triple it was for myself and not be prepared to at least assist my children with those costs.

    The longer you wait, the harder it will be to use the time and compounding interest gains to help them.

  • Stephen July 11, 2011, 3:02 pm

    You may think it’s selfish to use the Child Care Benefit for anything other than RESPs. What about those insensitive clods who are using it for child care?

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