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Get an RESP or pay down debt?

August 28, 2018

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Get an RESP or pay down debt?

Planning & Advice

You already know about the ABCs of an RESP. It’s there to help fund your children’s education, even as tuition keeps rising. After all, the average tuition cost for a Canadian university — before the cost of books, travel and supplies — is $6,500 per year.

Higher-cost programs can range anywhere from $8,000 to $22,000 per year. The average student loan debt in 2015-2016 was $13,306 — which can be a very heavy burden when you’re just starting out after graduation. And if you took a longer program, it could be even heavier.

Education LevelAverage Debt at Graduation
College$14,900
Bachelors$26,300
Masters$26,700
PhD$41,800

Source: 2010 Statistics Canada report

It’s not just tuition. There’s the additional cost of living while attending school. Your adult kids can’t work when they need to study. That opportunity cost that can really do a number on your kids’ finances. So you want to help them…

But right now, it feels like you’ve got more urgent priorities. Maybe you’ve got your own student loans, a mortgage or some other obligation of adulthood. Isn’t paying off debt first always the smart thing to do?

Should you get an RESP or pay down debt, invest and pay for your kids’ education later? That depends on you.

Some rules of thumb about whether to invest in an RESP or pay down debt

Financial advisers love giving rules of thumb, but in this case, it really depends on your personal situation. For many Canadians, it will be better to invest in an RESP now. For some, not so much. Investing in an RESP is like other kinds of investing: it’s a trade-off between using the money now, or using more of it later.

If you are deferring costs of that education, you’re going to have a steeper hill to climb when you do start saving. Here are some important considerations:

  • What’s your timeline? When are the kids going to be in school? And when do you want to be mortgage-free?
  • How much are your debt payments? Got a low-interest mortgage or student debt? It may be OK to invest even while you are making regular payments on the debt. Financing your lifestyle through high-interest credit cards? In that case, you better pay that off ASAP.
  • What are your own financial goals? Many people make sacrifices for their kids — but it’s not a selfish thing to want to save for your own bucket list. An RESP is one way to allocate your resources. But your kitchen sure needs an update. It’s been years since you took a vacation…

Let’s see how these kinds of real-life factors might translate into real decisions.

Zakk and Ella, RESPs and the School of Hard Knocks

It seemed like only yesterday that Zakk and Ella fell in love back in university. But time flies. Today, they are a married couple with careers, a toddler and a new child on the way! Ella is looking forward to maternity leave.

Zakk is now a high school English teacher. With Ella’s maternity payments, they’ll earn about $72,000 this year. That’s less than the median household income in Toronto by about $6,200, but they’ll manage.

With $72,000, they still have just enough to cover all of their monthly budget. That includes mortgage payments, car costs, groceries. Their entertainment budget is cut down to the bone. They’re going to forego any travel this year, too.

By scrimping and saving in other ways, they can also afford a $209 monthly payment into a new RESP when their newborn comes into the world. That’s the amount that maximizes a matching Canadian Education Savings Grant from the federal government (They already have a similar plan set up for their two-year-old, which they will continue paying into for about 16 more years). That way, their kids will have the best opportunities to learn and be successful, without taking on a mountain of debt.

Alternative schools of thought and outcomes for Zakk and Ella

Different variables and different financial goals could have easily skewed this outcome. Imagine if any of these things happened:

  • Big debt! Zakk still owed tens of thousands in high-interest debt from a failed business. He and Ella are diligently paying it off. However, it’s going to take at least three years before they’re in the clear. In this case, it makes more sense to pay off those loans before putting money into an RESP.
  • Extended family obligations. Zakk’s aging parents are going through a bad spell of health problems. It looks like they will need long-term care, or possibly live with Zakk and Ella (It’s going to be crowded). This was not a financial burden they planned for. Depending on their cost of care, their best option might be to hold off on the RESP for now.
  • A financial windfall. Ella’s parents have done well from a lifetime of saving and investing. They want to share their wealth. There’s already a trust fund for the kids’ education! In this case, setting up the RESP could still be a good option. The grandparents could contribute from their savings for the kids.

In real life, there is always a trade-off between what you want to do and what you can actually afford. It’s not just a question of math.

So, what are your priorities? Secure retirement, or having kids go to university without taking on debt? These may be difficult, uncomfortable conversations to have within your family. And without those conversations, the choices will be made for youThat’s why it’s a good idea to talk to your financial adviser about how saving for your child’s education can fit in your overall financial plan.

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