State of Mind Episode 7, ‘The Cost of Education’ is about the rising Education prices. As mentioned by Krishna Nadella, a study by the Department of Agriculture stated that it costs the average middle class family in America over $245,000 to raise a child. However, it can easily cost more than that to send a child to college.
The main question is; how can one save up for college?
As mentioned in the Student Life: Personal Finances article, tuition has been rising faster than inflation in many developed countries around the world.
Saving up for such a large expense can be quite tricky. It’s all about managing your money effectively, and having a good understanding of your cash inflows and outflows. There are several options where you can earn a Return on Investment from the money saved – this includes investments (such as stocks, and mutual funds), Guaranteed Investment Certificate (GICs), and Bonds.
Joseph Brusuelas from McGladrey LLP mentions that prices are typically much higher for higher education – because of the availability of student loans. Brusuelas stated that the rate of education has been falling since the financial crash – and wouldn’t be shocked if the education costs ease.
Methods of Saving
Typically, saving consists of a plan where you have the goal of saving x dollars by a certain date. However, there can be the uncertainty of knowing what school you’ll be going to, and how much it would cost. Debra Chromy, President of Education Finance Council states that there are too many factors involved and it’s best to save what you can.
When should you start saving? As soon as you can. Open a registered account, and set an automatic transfer to it each month, or bi-weekly.
Reyna Gobel, from graduationdebt.org mentions that you should ask friends, and family for help – in order to reduce the burden on your wallet. It’s recommended for parents to not pay for their children’s education at the expense of their emergency funds and/or retirement. There are many resources available, ranging form the school’s financial aid, grants, scholarships, and student loans. Paying for college can be a combination of loans and savings.
Each region has their own registered savings plans – where contributions/withdrawals can be tax exempt. In Canada, there are three types of Registered Accounts that can assist with your (or your children’s) tuition payments. The three useful accounts are Tax Free Savings Accounts (TFSA), Registered Retirement Savings Plan (RRSP), and Registered Education Savings Plan (RESP).
These registered accounts offer a high flexibility in terms of where the money can be stored. It can be in cash (where the interest rate earned is typically the bank of Canada rate), Guaranteed Investment Certificate (GICs), or Investments (mutual funds or stocks). Keep in mind that it may take a 1 – 3 business days to access the funds – depending on your financial institution.
Tax Free Savings Account (TFSA)
If you’re going to put aside money for at least the short term – it’s best to have it in a TFSA. The main advantage of TFSAs is that all capital gains are non-taxable. The one downside is that there is a limit on the contributions – for the 2016 year, the contribution limit is $5,500.
For the the years 2009 – 2012, the annual limit was $5000. The annual limit for 2013 and 2014 was $5,500, and $10,000 for the 2015. However, for the 2016 calendar year, the new limit has been reduced to $5,500.
How much can you contribute? You can contribute for previous years, up until the year you turned 18 (or no earlier than 2009). For example, if you turned 18 in 2015, you would be able to contribute the 2015 & 2016 contribution limit, which would be $15,500. TFSA is an effective tool to use in order to avoid taxes on capital gains, and still have access to the funds.
Registered Retirement Savings Plan (RRSP)
The main purpose of a RRSP is to save up for retirement – however it has other purposes too. It can be used towards the down payment of your home through the RRSP Homebuyer’s Plan (HBP), or to help pay off your tuition through the RRSP Lifelong Learning Plan (LLP).
- RRSP HBP
RRSP HBP allows you to withdrawal up to $25,000 in a calendar year – to buy or build a qualifying home for yourself a relative person with a disability (CRA). The funds would have to be repaid within 15 years.
- RRSP LLP
RRSP LLP allows you to withdrawal amounts from your RRSP to finance full-time training or education for you or your spouse/common-law partner (CRA). The maximum withdrawal is $10,000 a year to a maximum of $20,000 in total, or $40,000 if a couple is going back to school (Money Sense). All funds withdrawn would have to be repaid within 10 years.
Registered Education Savings Plan (RESP)
This tax-sheltered plan assists you in saving for child’s post secondary education, or for a family friend/relative. The main advantage of the RESP is the government contributions. There are two types of government contributions involved – the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).
For the CESG – the government matches 20% on the first $2,500 contributed, annually. The maximum CESG each beneficiary can receive (up until the age of 18) is $7,200. A $500 CLB credit is provided for children born after December 31st, 2003. Those born after this date also qualify for a $100 CLB instalment per year, up until the age 15. The maximum CLB per beneficiary is $2000.
All speakers in this episode emphasized this point – take advantage of the resources available. Joseph made a great point – it’s important to know the system of your school. In other words, understand the scholarships, grants, and loans available. In fact, there are plenty of scholarships available – it’s only a matter of applying for it. Some students have been able to pay off most of their college tuition with scholarship money.
The major take-away of this episode was about how to save up for education. There are many resources available, through the school, government, and even your family and friends. Take advantage of a savings plan that will allow you to save effectively. College is one of the most important stages of your/your children’s lives – it’s important to take full advantage of it.
For tips on how manage your personal finances during college/university, refer to Student Life: Personal Finances.
Writer: Jelani Smith
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