Now that I’m on the verge of being called “mama”, virtually all my attention and focus is devoted to the arrival of my little babe — and that includes her current and impending financial impact.
After the costs of pregnancy, my maternity leave, and more baby gear than I knew existed let alone was necessary, one of the other major financial things I’m mulling over is saving for my child’s post-secondary education. The moment my girl has a SIN number, she’ll get her first savings account: the RESP.
What is the Registered Education Savings Plan (RESP)?
The Registered Education Savings Plan or RESP is yet another awesome tax-advantaged savings account available to Canadians, like the TFSA or RRSP. This account is designed to help and encourage parents to save for their child’s post-secondary education. One of the biggest advantages of the account is free government grants that match 20% of your contributions, to a maximum of $500 per year. This is called the Canada Education Savings Grant, and you can receive a lifetime maximum of $7,200 for your child’s post-secondary education. Just think: that’s $7,200 less in student loans your child will have to borrow. Nice, right?
Related post: The TFSA vs. The RRSP
Like the TFSA or RRSP, you can invest your child’s RESP in things other than a savings account. When you invest an RESP in mutual funds, stocks, or ETFs, you can earn a higher return — giving your child even more money for their future education. The RESP itself has a lifetime contribution limit of $50,000, but interest, dividends, and capital gains can make this amount grow to much more.
Any amount you save will help your child, so don’t shy away from opening an RESP even if your budget is so tight you cannot afford to put more than $25 or $50 per month into the account. You have approximately 18 years to save for your kiddo’s education, which is plenty of time for even small amounts to make a difference!
I have only one word of caution: make sure to open an individual or family RESP, and steer clear of Group RESPs or “Scholarship Funds”.
What’s the difference between Group and Individual RESPs?
An individual or family RESP is an account you open and manage at your bank. When you open an individual or family RESP for your children, all the money you put into it is allocated directly to them. When it comes time for them to enroll in post-secondary, they are the only ones that get to withdraw from the account and they are the only ones all the savings you’ve worked so hard to set aside can go to.
A group RESP is typically provided by a company, not by a bank. In a group RESP, often called a “scholarship fund”, the money from multiple contributors for multiple children of a similar age is pooled together. Everyone agrees to keep up contributions, as well as put in their CESG grants, to help the entire pot grow. When the children grow up and attend post-secondary, they all get a piece of the pie — and there’s usually more of it, because over 18 years, a number of parents will have had to withdraw from group RESP because they couldn’t keep up with contributions or they came to their senses and decided to manage their child’s RESP themselves. However, the fees they paid and most of the contributions they made stay in group RESP, benefiting the people that remain.
There’s no real benefit to choosing a Group RESP over an Individual RESP for your child. Group RESPs do not typically outperform individual RESPs, though they’ll claim to. However, most of the “return” on Group RESP and Scholarship Fund contributions is actually the result of the Canada Education Savings Grant coupled with the fund’s exorbitant fees.
Your baby deserves better than a group RESP
Group RESPs are the new thing that makes me extra rage-y, much like MLMs, gifting circles, and payday lenders. Group RESPs/Scholarship Funds actually have a lot in common with MLMs and payday lenders in the sense that they target economically vulnerable people with wild claims that they can solve all your financial woes with ease — a telltale sign they’re about to make your financial health much, much worse.
There is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation – Human Resources & Social Development Canada
The main wealth-killer in group RESPs is their fees: enrolment fees, sign-up commissions, and so on. These come hard and fast in the first few years that you open the account, which means your contribution barely grows. Like for this mom who put $568 into a group RESP and then received a statement that her balance was only $66. That’s $502 up in smoke!
Fees are also on the other end threatening to kill your investment if you dare take it out early. If you realize your scholarship fund is underperforming and you want to go elsewhere, taking your money out can mean losing almost all of it. Like this mom who wanted to withdraw $3,000 from a group RESP, only to learn she’d spend $2,000 in fees to do so.
Another major downside is group RESPs can be specific about what type of post-secondary education they cover. The Canadian government allows for RESP funds to be used for more than college or university, your child can also put them towards part-time studies or trade school. However, a group RESP might have stricter rules. Which means you could diligently contribute to a group RESP for 18 years, only to find your child wants to become a hairdresser, enrolls in beauty school, and is told the scholarship fund won’t be covering that. Not cool.
You have 60 days to pull your money out of a group RESP once you sign up, but once you’re past that mark, it becomes so expensive to leave you might want to sit and tough it out and hope your child grows up to attend a traditional post-secondary institution.
Watch out for financial salespeople pushing Group RESPs
In my city, a couple hosts free baby budgeting workshops at a local post-secondary institution. They seem to be very nice people, the college gives it an air of legitimacy, and every expecting parent wants to know how to afford their new little bundle of joy. However, if you look closer, you’ll see the couple teaching the free baby budgeting workshop are work for one of the largest financial brands that sell group RESPs.
How much do you want to bet their “free” workshop includes a hard pitch for the horrendously expensive lousy group RESP they make huge commissions from every sale of?
People selling Group RESPs are shamelessly aggressive about it. They troll birth classes and maternity wards, looking for new parents who want the very best for their new baby and con them into a bad product under the guise of helping them provide for their child’s education. They send pamphlets out with free coupons for formula and diapers. They randomly approach very pregnant women and thrust their business cards in their face. It’s as bad as cord blood banking, except you never expect stem cells to pay you back.
How do I save and invest properly for my child’s future?
Step one: steer clear of Group RESPs and Scholarship Funds. This alone will ensure your child will actually have savings for their post-secondary education in their future.
Step two is a matter of setting up an account at a trusted institution that you can make regular contributions to. It’s important to invest your money to earn the highest return, but if you’ve already got a newborn to master, you might not feel confident taking on the stock market. It’s ok to start with a savings account, and move to a mutual fund or ETF portfolio later. In the meantime, focus building up that account so you can earn the maximum Canada Education Savings Grant. This boost from the government is a 20% return on your contributions all on its own!
Helping your child with the costs of their post-secondary education is a generous and powerful gift that they will reap the financial benefit of for years to come. For this reason, it’s even more important that you choose an RESP that maximizes your contributions and ensures all your savings goes directly to your child where and when they need it.