Coping with the cost of higher education

A lesson in personal financial management

There’s no two ways around it: The cost of a post-secondary education is high. For some, it’s a real challenge to make ends meet while attending college or university. In fact, students can expect to pay a total of about $60,000 for an average four-year post-secondary education program, including tuition, books, board and lodging, and living expenses. It’s more than double that for professional degrees like law, medicine, dentistry, and engineering.

Thinking of a tony U.S. school? Think again. The cost for a general undergraduate U.S. Ivy League school is a minimum US$60,000 for one year.

Costs also rise annually as a result of inflation and other factors, including increasing expenses at schools, costs of accommodation, and so on. All in all, the myth of the poverty-stricken student is no myth, unless they have some strong financial backing and a good lesson in basic financial literacy.

According to a study last year by Maclean’s magazine, for most students, the priciest elements of the average annual $20,000 cost of post-secondary education are rent at 40% and tuition at 34%. The remaining 26% is devoted to everything else – books and study materials, groceries, campus food, travelling expenses, alcohol, and extracurricular activities.

So how do students get by? Surprisingly, most funding does not come from Registered Education Savings Plans (RESPs). According to the Maclean’s survey, about two thirds of post-secondary students do not even have an RESP. In fact, 20% of students get most of their funding from parents or guardians, and 20% get most of their funding from student loans.

Only 12% of students say they get most of their funding from their own savings, while a minuscule 5% of students get most of their funding from scholarships and bursaries.

These are pretty low numbers. The bulk of students fund their post-secondary education with a mixture of these sources, and end up struggling by on a shoestring (which, arguably, has always been a description of student life). But it doesn’t really have to be so bad if you budget properly.

How can students cope on a limited budget?

First, apply for every available bursary, scholarship, or grant that you can find related to your area of study. Consult with your high school guidance counsellors or your prospective university or college. Many grants and bursaries are available in niche areas that go unawarded simply because no one applies for them, but you’ll have to do your research.

Economize on books and study materials by buying used textbooks, downloading electronic versions, sharing with roommates or classmates, borrowing from the school library, or using older editions if possible.

Live in a shared residence if on campus or live with roommates off campus to share costs like utilities and Internet connections.

Budget for the cost of meals. If living in residence during the first year of university, check on the various meal plans available. Often, schools will offer plans ranging from full-blown three meals a day to a ticket system. These are often offered for off-campus students as well. If you’re taking responsibility for your own meals, shop wisely, look for discounts, and cut eating out (and the accompanying alcohol intake) to a minimum – that’s a real cash vampire.

Transportation can be a big expense, especially if you have a car. In addition to gas, maintenance, and insurance, you’ll likely also have to pay for parking, possibly both on and off campus. Seriously consider public transit for getting around. These savings can really mount up.

Registered Education Savings Plan (RESP)

To avoid the anxiety of not having quite enough to fund the complete college experience, parents should start saving for their children early. One way is through the Registered Education Savings Plan (RESP). But to be most effective, it should be started early, usually when the kids are in early grade school. Like other registered plans, investments inside the plan grow tax free, although there is no deduction for contributions made. Tax is payable by the beneficiary when funds are withdrawn for post-secondary education payments, but he or she will very likely be in a low or zero tax bracket, so the tax impact will be small or non-existent.

There is no annual limit for contributions, but there is a $50,000 total lifetime limit that can be contributed for a single beneficiary. In addition, the federal government provides a Canada Education Savings Grant (CESG) of 20% annually on each dollar contributed to an RESP up to the first $2,500. That’s a potential extra $500 every year for the maximum contribution.

The money can really add up if you start early enough and contribute regularly. Often grandparents and other relatives will help with contributions. For example, an annual contribution of $3,600 ($300 per month) to an RESP starting when the child is two years old, and running for 15 years at a conservative average annual compounded rate of return of 5%, will grow to $79,500 by the time the child is ready to attend university. Even a $150 monthly contribution will grow to nearly $40,000 in the same time. So an RESP really makes sense – provided it’s opened up early on.

To open an RESP, the child will need to have a Social Insurance Number, so as crazy as it seems, as soon as you have your child’s birth certificate, apply for a SIN to be eligible for government benefits, including the CESG.

Tax-Free Savings Accounts

For parents of younger children, an additional way to save for a child’s post-secondary education is by opening a Tax-Free Savings Account (TFSA). However, you cannot open a TFSA on behalf of a child because you have to be over 18 and a have a valid Canadian Social Insurance Number to open one. But each parent can open their own TFSA and use one or both for education savings. (It doesn’t matter what you use the TFSA for.)

The annual contribution limit for a TFSA has risen to $6,000 in 2019, and it is not income-dependent or limited by contributions to other plans like RRSPs or RPPs. Unused contributions can be carried forward to future years, bringing total contribution room available since the introduction of the plan in 2009 to $63,500 for someone who has never contributed to a TFSA. There is no tax deduction for contributions to a TFSA, and of course, there is no top-up government grant as there is for RESP contributions.

Like an RESP, savings in a TFSA can really add up. If you start when a child is age two, and contribute $250 monthly ($3,000), at an average annual compounded rate of return of 5% for 15 years, you’ll have $72,000 in your TFSA to put towards a child’s education. Investments in a TFSA grow tax-free, and withdrawals, which can be made in any amount at any time, are also tax-free, unlike an RESP.

There’s no deadline date for contributions for the year, because there is no tax deduction available for contributions as there is for RRSPs. You can contribute any amount at any time you want through the year, as long as you don’t exceed your maximum.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.