Me and My Money

A Debt Free Degree

Posted November 25, 2011
Originally Published March 14, 2011

A six-figure income sounds very appealing. How about a six-figure education bill? Depending on who’s crunching the numbers, $100,000 plus is projected to be the cost of an undergraduate degree 18 years from now. If you have young children and don’t live within commuting distance of a university you might think about moving because, according to a late 2009 report by TD Economics, a student living away from home will run up a tab of nearly $140,000.

Those gag-making stats include tuition, books, academic fees and living expenses. Even those staying at home while they study will still need money for transportation, clothes and food.

Now, before you reconsider parenthood, there is some good news. With a bit of savings diligence you can send your wee ones off to the ivory tower with a six-figure education fund and the chance of graduating debt-free.

The secret to hitting that $100,000 savings mark lies in contributing to an RESP every single month for 18 years and receiving the basic Canada Education Savings Grant (CESG) of $500 annually per child. The grant is based on a net family income greater than $81,941 annual contribution of $2500 or a little over $200 monthly.

Families with lower incomes will receive slightly more; with net family incomes between $40,970 to $81,941 the CESG is $150 on the first $500 deposited and $200 for incomes $40,970 or less. Everyone gets 20 per cent on the next $2,000 contributed. The last CESG payment is made the year a child turns seventeen.

Of course, finding $200 every month can be a tough for new parents since young families go hand in hand with additional expenses and, often, lower household incomes as one parent may choose to stay at home.

Here’s a plan that can work. Many new parents will receive the Child and Family tax benefit. For example, if family net income is $50,000 then the benefit would be just under $100 per child. Set up an automatic transfer of the benefit payment (currently they are made on the 18th of the month) into an RESP so it is whisked away before it disappears into general spending. That only leaves $100 and change every month to be found elsewhere.

Calling all grandparents! If funds are especially tight in your household consider asking the extended family to make RESP deposits instead of gifts. Even $20 a month each from a handful of relatives quickly adds up to help you reach that $2500 annual threshold for the maximum CESG.

I know a family which saves all of their change in a jar and each month counts it up and deposits it in their RESP. It averages around $100 monthly.

Now comes the investing part. Here’s how to send your child to university with six figures in the education savings piggy.

Your contribution Government Grant Rate of Return
over time 18 years
$208.33 monthly = $2500year $41.67 monthly = $500year < age 13: 7% in a mix of GICs, bonds & equities
> age 13: 5% in mix of bonds & GICs $99,948.00

The rate of return is historically fairly conservative. I am assuming interest rates will rise a bit over time. If we revert to more normal historical averages then the final result will be higher. I have also assumed that equities will comprise 50 per cent of the RESP portfolio until age 13.

The rate of return is based on monthly compounding for the GICs and bonds and doesn’t take into account inflation. The end result will be lower if contributions are made annually or semi-annually rather than monthly. I’ve used the $500 basic CESG because that’s what everyone gets on a $2500 contribution.

The reason for altering the asset allocation or investment mix at age 13 has to do with time frame. As it gets shorter you should stop investing in equities, say an equity mutual fund or exchange traded fund, and put your contributions into GICs and short term bonds, such as a short term bond exchange traded fund.

Additionally, if you invest in an equity mutual fund sell a portion every year after age 13 and move the money into GICs. Your child may not end up going on to post-secondary education right after high school but it is far better to risk a lower return than a big loss. You don’t want to be sending your child off to the hallowed halls of academe just as a 2008-style market meltdown decimates the RESP’s bottom line, forcing you to sell equities at a low point in order to pay the tuition bill.

Of course, you will have GICs and bonds to draw upon in the first couple of years. You could always stick with equities right to the time your child goes to university and hope that if there is a market crash it will recover by year three.

On the other hand, safe beats sorry in my books. If you don’t want to invest in equities you will still end up with a healthy sum. Assuming a five per cent compounded rate of return with GICs and bonds, the RESP will be worth $87,300 after eighteen years.

Student debt is likely with us for eternity but a six-figure RESP gives your child a shot at a debt-free degree.

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