This article is brought to you by Insurance for Children, Canada’s leader in financial planning for children and the creator of Child Plan ™ the fastest growing alternative to the RESP.
When you went to university or college, did you ever think one day your child will want to learn a trade rather than get a university degree?
Did you think they’d be going to elementary or high school completely online without stepping foot in a classroom for two years?
Did you think the cost of a university education would be as expensive as a Mercedes luxury car?
Internet, Inflation, Covid
Over the past few years as we met with hundreds of families to help them save for their child’s future education and life we always asked the same question.
What are you doing for your child’s future and what were you told an RESP is?
We wanted parents to know they shouldn’t feel bad if what they thought the RESP was while in reality the RESP was something else completely. We would ask what were you told a by a bank mutual fund salesperson or a group RESP salesperson the RESP is?
We always got almost the same answer. We were told it’s an education savings plan for our child’s education and the government would give us some money towards their education.
After some conversation, they were always shocked when we shared the shocking information that the RESP isn’t an education savings plan but a Government program with Government rules on where your child can go to school, what they can study and how the money you saved can be used.
Parents are always surprised to learn that the RESP is not an education saving program but a government program where the government gives you a 20% matching CESG grant of whatever you deposit up to a maximum of $500 a year.
If you deposit $2000 a year into your child RESP, they will give you a matching CESG grant of $400. if you deposit $2500 they will give you a matching CESG grant of $500. If you deposit $3000 you will still only get a maximum CESG grant of $500.
The maximum RESP grant your child will receive by the time they are 17 is $7,200 if you deposit $36,000 into the RESP account. That’s it nothing more, the rest is entirely up to the stock market which you can do from your TFSA account or your investment account.
This is where parents get upset when they learn that in order for your child to use the RESP. They must at the age of 18 select a university, college or training program that had been pre approved by the Government of Canada.
If your child chooses a different path than the one set by the Government then you have to close down the account and send back all the RESP grants they gave you even if your advisor lost it on the stock market.
However if there is any growth in the account and your child has chosen a path that had not been approved by the Government of Canada your child can’t use the RESP, you will have to return all the grants in the account and you can’t withdraw that growth until your child is at least 21 years old and then you will have to pay income taxes on the growth, plus a 20% penalty.
At each time the parents are in shock to hear and realize they weren’t told of all the penalties and taxes and conditions in the fine print. Beyond all the rules and restrictions of the RESP the top three reasons that have now made the RESP irrelevant for you child’s future education is Internet, Inflation and COVID.
When the RESP was launched there was no Internet. You went to school in person and locally. As the Internet has grown over the past 20 years the growth of online education and courses and degrees have also grown exponentially.
In 2012, there were only three free courses offered by Stanford University. In 2021, that’s grown into a global phenomenon with 120 million learners, 13.5 thousand courses, 900+ universities, and 50 online degrees from providers all over the world.
When you think how this has grown, it could very well be that by the time your child is 18 and ready to get a post-secondary education they could be able to select programs and courses from two or three or even four different universities throughout the world.
Since the RESP was designed for your child to attend only one university or college program at a time, it could mean that saving in an RESP for 18 years won’t help them at all. The second factor that’s pretty much erased any benefits of the RESP for your child’s future education is inflation.
The RESP grants were first introduced in 1998 and according to Knowledge first financial a group RESP company “Though you may use your RESPs funds for many post-secondary paths, university education is typically the most expensive route. Based on data from Statistics Canada, the average cost of a four-year university degree starting in 2022 is $96,004 for students in residence, or $48,074 for students living at home (a nationwide average across all programs).” And that’s a group RESP company.
In 1998, when the RESP grants were started the average cost of a four year university education was less than $20,000. At that time the matching RESP grants was 20% of whatever apparent put in up to maximum of $400 a year or $6000 by the time your child reaches 18 if you deposited $30,000 by the time their child turned 18.
Since 1998, the annual RESP grants have only been increased once in 2008 from $400 to $500. That’s it. In other words. If your child’s education will be over $100,000 by the time they get a post secondary education. What will an RESP grant of $7,200 do to help. Not much.
In short the Government of Canada is hoping that parents will stop using the RESP and that inflation which will increase the cost of education, parents will view it as effective way to save for their children’s education. In other words they want to inflate their way out of the problem.
The RESP was first created by governments in 1972 to help your grandparents save for your parents education. But since then the world has really changed and is the Government program the best way to save for your child’s future?
As parents we want to give our children the best education possible, we want them to have the freedom to choose the education that they will need to succeed in the future. However the RESP is a government program with government rules that was designed for a generation and an education system that is no longer relevant.
And then there was COVID. When COVID began, every university, college, and high school converted their in person classes to virtual online classes. Two years later when COVID began to recede many universities and colleges throughout the world suddenly realized that they can double the size of their student population without adding buildings by simply offering courses and programs and degrees completely online.
COVID has unlocked the true potential of a global education, where students are able to live in one continent and attend classes in another. The growth of multi open online courses is now exponential as students begin to realize to get the best education no longer means attending a local university or college. COVID also unlocked the potential for students to find the most cost
effective education throughout the world, while the RESP requires your child to attend classes at one local university that’s been pre approved by the Government.
The RESP was a program designed for students to attend local universities and colleges both in their cities and within their country. However, the RESP was designed for a student to use the money saved in the RESP for one college or university at a time. As many parents today have learned the hard way the rules and the restrictions of trying to use an RESP in a global world where they may wish to transfer between universities, change programs or simply take gap years only to realize the complex reality and the confining rules of the RESP.
The number one comment we get from all parents when we speak with them about their children’s future and their future education is that parents today want flexibility, security and an investment that their child can use without restrictions for both education and for life.
Child Plan™ is the fastest growing alternative to the RESP and the only tax-free investment parents and grandparents can open for their children and grandchildren in Canada.
From the day that you open a child plan for your child or grandchild they will receive a tax free annual dividend for life which will give them the freedom to get the best education whether it’s local, global, or virtual in the future.
To learn more but Child Plan™ click here to request your personalized child plan illustration.