Debts Gone Wild: How to Tame Education Expenses
Eric Putnam
City Parent Education Guide
February 2009
Do you dream of the day when you will proudly watch your children receive their college or university diploma or degree?
For many parents, this will be one of the most important days in your life. But it can be accompanied by a steep price tag. With post-secondary tuition fees alone averaging more than $4,700 a year* – and rising – graduation often carries a heavy burden of debt for parents and their children.
The good news is that you can tame education expenses. By planning ahead and using some of the following strategies, you and your children can enjoy a happy, debt-free graduation day.
When your children are young
Make education a savings priority. A post-secondary education -- trade school, college or university -- is no longer a luxury, it’s a necessity for most of us to earn a reliable living.
Unfortunately, you can’t count on government student loans to finance your children’s education. Many parents end up deeply in debt because they assumed their children would have access to a student loan or grant – and found out too late they couldn’t. Often, students don’t qualify because family income exceeds certain limits. Since these thresholds and other qualifying criteria often change, think of government financial assistance as a last resort.
The same caution applies to student lines of credit available from banks and other financial institutions. These programs are based on floating interest rates and if the rate rises, so does the cost of borrowing. Lines of credit can also lead to overspending. Since the funds are available when needed, they can be hard to resist. While only interest must be paid while a student is attending school, once a child graduates, payments on the principal also come due.
A better option is to set up a savings plan when your children are young. The cumulative effect of depositing even a few dollars every week can build education savings of thousands of dollars while your kids are growing up.
One of the best plans is an RESP (Registered Education Savings Plan). You can contribute up to $50,000 to an RESP and the funds grow tax-free until your children need them for post-secondary education. As well, when you set up an RESP, you can apply for the federal government’s Canada Education Savings Grant and the Canada Learning Bond. Through the grant, the federal government will add another 20% to 40% (depending on family income) to the money you put into an RESP. You may also be eligible for the learning bond – an additional grant of up to $2,000. If grandparents, other family members or friends want gift ideas for your children, you might also suggest they make RESP contributions.
*Statistics Canada, The Daily, October 9, 2008
The new Tax-Free Savings Account is another helpful way to save. You can contribute up to $5,000 each year to a TFSA without having to pay tax on the money those funds earn. You can also withdraw funds tax-free any time you need them, and you can replace the withdrawn funds at a later time. Allocating a portion of TFSA savings can be a flexible, cost-effective way to help pay for your children’s education.
Try to make regular deposits to an RESP or TFSA so that contributing becomes a habit and doesn’t feel like a financial burden. Families can save thousands of dollars just by putting loonies and toonies into a jar every day. Depositing the coins into an education account every month reduces the temptation of spending the growing pile of cash.
As soon as your children are old enough to understand the concept of saving – even age four or five, encourage them to set aside some savings for school. This helps them appreciate the value of a good education and teaches them important financial skills that will last a lifetime.
When your children are teenagers
When your children begin part-time jobs, remind them of the importance of setting aside some of the funds they earn. This is also the ideal time to teach your children how to manage their money. When they become teenagers, many kids buy with credit cards for the first time – and it is easy for them to quickly accumulate debt.
If you don’t have a lot of experience with budgeting and money management, sign up your teenagers, or the whole family, for a course. These are often available at local schools and community centres. If your children one day have a student loan, they will receive the money in a lump sum and should know how to manage these funds so they last as long as needed.
If the family is having trouble making ends meet, parents should seek financial coaching or credit counselling. Professionals can help you deal with money shortfalls and debt overload and develop a manageable education savings plan. You will end up in better financial shape and set a good example for your children.
Encourage your teenagers to ask the high school guidance counsellor about scholarships, grants and bursaries. Financial aid offices in colleges and universities also have such information. As well, investigate whether your employer offers student bursaries or scholarships for children of employees.
Talk to your kids about the difference in costs among schools. If they attend a local institution, for example, they may not have to pay for room and board, which can make a major difference in the total cost of their education. If they do plan to live away from home while attending school, teach your kids to cook. Cooking for themselves not only reduces food bills, it is a valuable skill your children can use all of their lives – and will keep them healthier. Other way students can reduce education expenses? Use local transit rather than a car.
As you can see, you don’t have to endure “debts gone wild.” Sit down with your kids every year and discuss their hopes for their education. By starting early and adopting good saving habits, everyone’s dreams can come true. Your children can attend their preferred college or university program. And one day you can proudly watch your well educated, financially healthy children receive their diploma or degree.
Eric Putnam is a senior advisor with BDO New Beginnings (www.bdonewbeginnings.ca) and Joyce Brown is a counsellor with BDO Dunwoody Limited (www.debtworries.ca). Both help individuals resolve their financial problems. You can reach Eric at 1 (866) 926-4700 or eputnam@bdo.ca and Joyce at (905) 524-1008 or jbrown@bdo.ca.
