studentwallet

My Parents Never Bought Me An RESP

When my parents first immigrated to Canada in 1976, a Registered Education Savings Plan (RESP) was the last thing on their minds. They had a combined net worth of a whopping $200, so they quickly needed to figure out a way to make money — and survive. The RESP had been introduced to the world only four years earlier in 1972 and was in its infancy, so the truth of the matter is nobody really knew much about them.

After I was born a few years later, the idea of purchasing an RESP had still not reached my parents’ minds — either through traditional marketing methods or word-of-mouth. The web as we know today and Social Media? It didn’t even exist yet. Most corporations were still working off of paper documents, and very few even had a computer on their floors. The Digital Age was still about a decade away, so information as a whole was still communicated in a very “sloth-like” way, compared to the lightning speed information we have today.

Many of my parents’ friends had started up their own businesses, like dry cleaners and convenience stores, with these two areas quickly becoming a trend within my parents’ networks. I had no idea at the time why these two business concepts were so popular, but I’ve come to realize it may have had to do with both businesses being easily communicated to customers. A simple “Hello” and “Goodbye” would really be the bulk of the everyday business conversation, and enough to complete a sale. This worked out perfectly for my parents and their friends, since most of them, being new immigrants, weren’t exactly “scholars” of the English language. My parents decided to take the plunge and opened up a medium-sized convenience store in our Scarborough neighbourhood.

My sister was born a year later, and luckily they’d ended up doing very well with the store, but decided to make their money work for them and so invested their money in other areas, like the stock market, life insurance and real estate. They lost a bit of money on the stock market, waited for the long-term payoff on life insurance, and they bought a house in the ‘burbs. All-in-all, things were looking pretty good so far, for them at least.

Let’s fast-forward to 1999. I was accepted to York University, and of course, I turned to my parents for tuition fees. Unfortunately, due to the bulk of their finances being locked up in investments, they couldn’t afford it. As a last resort, I turned to the good old reliable Ontario government, which promptly lent me the funds needed. The Ontario Student Assistance Program (OSAP), is a government program that lends money to students (based on eligibility, depending on the parent’s income bracket) at a low interest rate, of which students then have to pay back up to six months after graduation. This concept would have worked out great if I were to have somehow graduated and become a doctor, lawyer or hollywood screenwriter (still working on that one), but that obviously was not the case and so reality hit (really hard), and I became just another fresh grad with no job in sight, stuck with a mountain of debt and compounding OSAP interest fees that my parents couldn’t afford to help me with. I had to find a job, and fast.

Luckily, I did find a job! A small marketing firm hired me on a 6 month contract as a copywriter. Wonderful I thought. I’d have the opportunity to become a hotshot copywriter making ads for big companies like Coca-Cola®, Apple® and McDonald’s® becoming rich and famous in the process…well, hopefully the rich part at least!

Nope, not at all. I was barely making enough to get by. I had OSAP loans, credit card payments, and living expenses eating up my finances, —living the pay-cheque-to-pay-cheque dream. The government and credit card companies proceeded to hound me for their money and it got to a point where I couldn’t make the monthly payments anymore. But lo and behold, I found out there was something called the Repayment Assistance Plan (RAP), which was another program introduced by the government that gave fresh graduates a break by offering to cover any interest amounts owed on each payment. This was amazing, I thought; more disposable income! So, me being the smartypants I was, I continued to re-apply for the RAP program every six months and the government took care of the interest from my monthly payments. So I get to live like a rockstar, and the government will foot the bill right? Wrong! The interest I owed was being covered by the government, but the PRINCIPAL did not move at all. It was simply an illusion that the government was “paying off” the same loan I owed them. I snapped out of it, and reality hit me. I tallied up my OSAP and credit card bills. Basically, I owed the government and credit card companies enough to purchase a fully-loaded, brand new, shiny BMW! It was not a pretty realization at all. Tears were promptly shed.

Luckily, after my six month contract ended, I found work in the financial industry, but I still wasn’t making enough money to make even a minor dent in my mountain of debt. What was I to do? And how would I pay it all off? Well, to make a long story short, I got lucky, and mom and pop pulled me out of the pit of despair with some money they saved up, so I paid back the government everything I owed and made a deal with my creditors.

In hindsight of course, these headaches could have all been avoided if my parents had started investing early in an RESP for my sister and I. But what exactly is an RESP? And how much would they realistically have had to save in order to avoid all this? An RESP, formally known as a Registered Education Savings Plan, is basically designed so that parents can contribute a specific amount into their plan, so that when their children are old enough to attend college or university — typically at the age of 18 — they’ll have funds available to help pay for their post-secondary education. RESPs typically invest in lower risk fixed income investments and can either be pooled (known as group RESPs) or self-directed. In addition, beneficiaries may be eligible for some pretty nice government grants, provided they meet certain conditions. Here’s a webpage explaining Government Grants in a bit more detail.

RESPs also work as tax-sheltered savings vehicles, with the funds only being taxed when they are withdrawn (a tax break for the parents), which is always little to none since the tax would be based on the student’s income tax bracket at the point of withdrawal. A fantastic way to invest in a child’s future.

Moral of the story? I’m sure we’d all agree that we want what’s best for our children — I know I will some day.  Fortunately for me, I got lucky and my story ended on a positive note. However, there are still plenty of other recent graduates out there that don’t always get the same happy ending. Actually, according to Statistics Canada about 50% of graduates across all levels of education, relied on student loans (both government or non-government), which include private, family and bank loans.1 As a result, student debt has been pushed to historic levels. According to the Canadian Federation of Students, the aggregate of loans disbursed by the Canada Student Loans Program, less the aggregate of loan repayments received, is resulting in student debt increasing by $ 1 million per day.2

Another unfortunate statistic: a researcher from the University of British Columbia found that students with debt are less likely to complete their studies. For students with debt under $1000 their completion rate was about 70%, whereas students with over $10,000 was 34%.3

Finally, according to a recent CPA Canada survey, parents are under-utilizing the RESP. The survey found that almost 50% of parents have yet to open one.4  With rising tuition fees and other post-secondary costs, an RESP is a very wise investment if you want to help keep the debt collectors at bay once your children graduate and get a taste of the real world.

Curious about how much a child’s education may cost? Check out our RESP Calculator for a detailed estimate today.