Financing the future in education
Private school assistance
If you think education is expensive now, just wait a few years. Some forecasters say that in less than 20 years, a university education will cost $72,000 a year for tuition, residence fees, books, transportation, and a few odds and ends. That's six times what it costs today.
And that's just university. Private primary and secondary education can be expensive too. Tuition at private primary schools can now run $8,000 a year and top-notch boarding schools more than $25,000.
Despite these sums, private education and post-secondary education are not the sole privilege of the well-to-do. Many double-income, middle-class families are making concerted efforts to provide their children with what they feel is a superior education, affording the cost through a careful combination of sacrifice and planning.
"I've seen more middle-income families striving for a private education," says Allan Bush, branch manager for Financial Concept in Kitchener-Waterloo, Ontario. "Before it wasn't talked about in financial planning. Now it's talked about."
Regardless of which financial vehicle you choose, the key is to start early, says Bush. For instance, if you start when your child is an infant and invest $100 a month, based on a 10 per cent return it would be worth $40,162.12 when your child is 15. If you wait until your child is five years old, $100 a month would be worth only $20,145.72 when the child is 15.
"Start now, the sooner the better. Five years makes a huge difference," says Bush.
Bush says parents should look beyond the obvious methods to help pay for their child's education, savings accounts and loans, which either generate minimal revenue or add to the cost with interest payments.
The better options generally can be grouped into a handful of financial vehicles - scholarships and bursaries, mutual funds, trust funds and Registered Education Savings Plans (RESPs).
Scholarships and Bursaries
Many private and independent schools offer scholarships and bursaries to help offset the cost of tuition. They are granted on the basis of many criteria, from academic or athletic merit to financial need.
At Lakefield College School near Peterborough, which serves students from Grade 7 through high-school graduation, more than $500,000 in scholarships and bursaries is awarded each year, with some scholarships as large as $5,000. They aren't enough to cover tuition, but they can certainly help ease the burden.
"Each school has varying levels of financial support, and it's worthwhile for parents to investigate all avenues with the admissions office in financing their child's education," says Maureen Hughes, Lakefield's communications and marketing co-ordinator.
In terms of accessibility and ability to manage the funds, mutual funds are the most flexible financial vehicle.
Because they are in your name, not your children's, you can access the funds at any time, alter your investment strategies to suit your timeline - some financial planners recommend riskier investments if you're investing for a long time, then switching to less risky investments as you approach cash-in time - and use the money when and how you see fit.
With mutual funds, all interest income, dividends and capital gains are taxed in the contributor's name.
The term "trust fund" makes people think of wealthy grandparents leaving a bundle of cash for young heirs to spend when they reach a certain age. This might be true in some cases, but trust funds can be effective tools to help pay for private education.
"It's important to talk to your parents about it," says Mary Lamb of Oakville, Ontario, whose son is enrolled in a private school thanks to a trust fund. "When they make their wills and plan for the next generation, they can direct some of their funds specifically towards the education of their grandchildren. It's an investment choice that can also be a great gift."
Formal in-trust funds are generally used for large sums of money, says Bush, perhaps more than $50,000. They are established by a lawyer and can include conditions set by the contributor, such as when the money becomes available and how it can be used.
Also, the trust is a legal entity and pays taxes on income and dividends. The drawbacks are the lawyer fees of up to $1,000 to establish the fund, and annual administration fees of $250 to $500. Contributions to formal trusts are not limited.
Informal funds are generally used for smaller amounts of money and some tax differences apply. First, the contributor has to pay tax on the interest income and dividends. For this reason, says Glenn Lightfoot, manager of adviser-based planning for Royal Bank Wealth Management, "choose mutual funds that will defer gains as long as possible, such as an index fund, which generates no income until you sell it."
Second, when informal trusts are cashed in, beneficiaries have to pay capital gains taxes.
Also, beneficiaries gain full control of an informal trust at age 18 and can do with the money whatever they please.
Informal trusts don't carry administration fees, they aren't transferable, and there is no maximum contribution.
One final note about informal trusts: They are intended to create in-trust funds for a beneficiary; they aren't intended for use as tax shelters. Dumping money in and pulling money out may draw the attention of Revenue Canada.
In-trust funds can be opened through most financial institutions.
Registered Education Savings Plans (RESPs) are savings vehicles offered by financial insistutions that are similar to traditional Registered Retirement Savings Plans (RRSPs): They can hold the same investments and reflect the contributor's willingness to accept risk.
RESPs can be used only for post-secondary education, but they're well worth starting as early as possible, says Bush, because of some noteworthy benefits. Most importantly, for every $1 you put in, the government tosses in 20 cents, up to $400 a year (based on 20 per cent of the first $2,000 contributed). That's free money. And second, while you don't get a deduction when you contribute, the income earned grows untaxed.
"RESPs are a great vehicle because it provides you with a 20 per cent return on your money up front that can grow tax-free over a number of years," Bush says.
Royal Bank's Lightfoot agrees. "The first step is to embrace the RESP account in order to maximize the grant. Any excess money (over the maximum contribution of $4,000 a year per child) should be used for an informal trust." he says.
If you have more than one child, look at a family plan, says Lightfoot. You can invest for all your children, but if one decides not to pursue post-secondary education, the money can be used for his or her siblings.
When considering an RESP, shop around, says Bush. "You want an RESP where you choose the investment vehicle based on your goals. Look at set-up fees, administration fees, flexibility to change investments with no cost, and you want something you can direct."