How to plan for your child’s post-secondary education with as little debt as possible

Post secondary education costs money. Depending on the program, sometimes a lot of it. This is true for university, college, and even trade schools.

As a result, parents are increasingly struggling with the idea of whether they should encourage their children to attend post secondary education. While it is still likely they will have better career opportunities and earning potential over the long-term, this advantage continues to wane as tuition fees and other associated costs continue to far outpace inflation. 

Meeting of two friends at coffee table in cafeteria

Only you and your child can decide whether post-secondary education is the right path forward. Regardless of what direction their life ends up following, there are steps you can take to prepare for the costs of post secondary education to help ensure money isn’t the deciding factor.

Pre-planning advice for parents

There’s a lot to think about as a new parent. Even as your child reaches primary or even middle school, the cost of post secondary education likely still seems a long way off — but time flies and it will be here sooner than you think. The earlier you can begin planning, the less of a burden post-secondary education costs will be on you and your child.

Perhaps more importantly, your child(ren) will have more opportunity to:

  • Select a program they’re interested in vs. choosing a program based on cost
  • Choose a school that suits their learning goals (moving out of city or out of province increases costs exponentially),
  • Focus on academics (and potentially athletics) rather than working excessively to afford books and tuition.

A word about grants, bursaries, scholarships, and student loans

These can certainly be helpful to reduce or defer the costs of post-secondary education, but we don’t recommend relying on these to cover the costs of education.

Scholarships are fantastic. Encourage your child to apply for as many as possible. However, they’re also highly competitive and not nearly as lucrative as Hollywood makes them seem. Few Canadians will ever qualify for a so-called “full ride” based on academic or athletic achievement. Most scholarships are either of limited value or have a narrow scope governing what they can be used for. There will almost certainly be costs to consider even after scholarships are factored in.

Student loans can be problematic, too. While provincial and federal loans offer extremely low interest rates, they still create debt which can be overwhelming for young adults to manage at the outset of their careers. It’s also possible your child may not qualify for government loans depending on your household income and whether they decide to attend a local school or move to a different city.

Third-party loans and lines of credit from banks and other financial institutions are also an option. However, interest rates are generally two to five times higher than the government offers, you may be required to co-sign and repayment terms may also be shorter — which will only add to your child’s (or your own) debt burden. These can be helpful, but we don’t recommend relying on them exclusively.

So, with all that in mind, what can you do as a parent to support your child’s education?

Open a Registered Education Savings Plan (RESP)

RESPs can be a great vehicle to start saving immediately for post secondary education. Both parents and grandparents can open an account for a child (provided the child has a Social Insurance Number), and the account’s lifetime limit is $50,000.

These dollars are investable in stocks, bonds, and mutual funds, which can significantly increase the value of an RESP over time. In other words, the earlier you can start contributing, the more time the money has to grow.

The Government of Canada also offers a Canada Education Savings Grant (“CESG”) which is a contribution matching program of up to $500 per year (up to $7,200 over the life of the RESP). As well, lower income families may be eligible to receive money from the Canada Learning Bond (up to $2,000 over the life of the RESP). 

Two important things to remember:

  • Contributions are neither tax deductible by the contributor, nor taxable in the hands of the beneficiary (student) when withdrawn.
  • CESG monies received in the plan — as well as growth of, or interest earned on, the monies in the plan — are taxable in the hands of the beneficiary (student) as withdrawn. However, students are typically in a much lower tax bracket and benefit from tuition and textbook deductions which can help offset the taxable amounts.

Worried that you can’t afford contributions? First, remember every little bit counts. You might also consider contributing all or a portion of any monetary gifts your child receives. This is a great way to teach your child the value of saving and positions them to succeed when the time comes to pursue their education.

Note: RESPs are a complex and highly regulated investment vehicle. It is important to understand and follow the rules to avoid costly penalties. Consult a financial advisor who specializes in RESPs and can help you navigate and understand your options.

Open a Tax-Free Savings Account (TFSA)

Like the name suggests, a TFSA is a federally regulated savings vehicle which allows money to grow in the account completely tax free. Contributions are not tax deductible, but this option still provides a great degree of flexibility:

  • Your contributions aren’t tied to any specific goal,
  • You can access the money whenever you (or your child) want, and
  • Neither the interest accrued (usually 1 – 1.5%) nor any investment income earned within the TFSA will be subject to income tax when withdrawn.

TFSAs are not available to children under 18, so you would have to contribute to your own account on your child’s behalf. The annual contribution limit is $6,000 as of 2021. However, you may qualify for the lifetime contribution limit of $75,500 provided you turned 18 before 2009.

Note: Like RESPs there are rules surrounding TFSAs which could be costly if broken. Speak with a financial advisor and make sure you’re familiar with TFSA regulations and best practices before proceeding with any investments or withdrawals.

Communicate early and often

Young children love to imagine what they’ll be when they grow up. But this excitement tends to wane as they confront the very real costs of locking into a field of study and employment. Committing to a post-secondary program doesn’t just mean investing four or more years in a given program — also it can also be one of the largest financial investments of their entire lives.

Planning early as a parent provides options. But financial considerations are just one part of the equation. There may be value in your child taking a gap year, traveling, working, and figuring out what excited them before they apply for school and invest all that money you’ve saved. Keep the conversation open and do your best to eliminate expectations of what they should or ought to do.

You want the money you work so hard to save now to deliver the best possible return for your child. So just as you’re likely planning for and envisioning your retirement, try to incorporate the same discussions with your child as they grow up and cross over into the next phase of their lives.