The best financial support that parents can offer their children is a fully paid university or college education, not a house down payment.
This needs to be said following the recent release of some research by Royal Bank of Canada on the cost of a postsecondary education. Some quick highlights: University tuition cost increases have outpaced inflation since 1982, and it now takes 505 hours of work at today’s average minimum wage to pay the average university tuition, compared with 293 hours of minimum wage work back in 1990. Half of new undergraduates finish their schooling with some level of student debt, and more than 20 per cent of grads with a bachelor degree start out with $25,000 or more in debt.
Parents who want to help their children deal with these costs should save in a registered education savings plan, or RESP. Money accumulating in an RESP is tax-sheltered and, on withdrawal, taxed in the hands of the student beneficiary. Best of all, contributions per year of up to $2,500 receive a matching 20 per cent through the federal Canada Education Savings Grant (CESG), to a cumulative ceiling of $7,200. You can’t pass this up.
Yet a lot of parents do. The RBC study shows that only 51 per cent of eligible individuals are RESP beneficiaries. The encouraging news here is that 420,000 postsecondary students received an average $8,487 to pay for their postsecondary education in 2016 through an RESP, up from $4,638 in 2003. The discouraging news is that the average tuition cost per student outside of Quebec now averages $7,600. Books, transportation and accommodations are extra.
RESPs hit their stride as a savings tool back when boomers were parenting young kids. The program was launched in the 1970s, but didn’t become relevant until the CESG was introduced 20 years ago. With all the years boomers had to save in RESPs, the best they could come up with on average was basically a year’s tuition cost at today’s rates plus books.
The soaring cost of an education totally escaped them. The surge in housing prices has not. Helping adult children buy a home has decidedly gone mainstream.
“Most first-time buyers receive help from family and this is increasing,” says the latest Annual State of the Residential Mortgage Market in Canada report from Mortgage Professionals Canada (representing mortgage brokers). The report says 43 per cent of the most recent buyers received gifts and 19 per cent received loans from family.
Let’s tally up the parental support for college and university degrees, and for home buying. Just over five in 10 young adults are getting financial help with the cost of schooling, and nearly as many are getting help to buy houses and condos. Gen X, Y and Z, try to do better.
Let’s first be clear about the value of a postsecondary education. RBC said the median university graduate working full-time earned 63 per cent more than the equivalent high-school grad in 2015. As for colleges, the average income of people with a non-university, postsecondary qualification rose the fastest of any educational group since 2000.
The challenge for parents with RESPs is that they need to find money at a point in life where they may not have much to spare. For some families, helping adult kids buy a home is easier financially than opening and contributing RESPs for little children.
Here’s why today’s parents of young kids should persevere where possible. With contributions of $2,500 a year for 16 years, a parent could end up with just over $67,000 (assumes a conservative 4 per cent rate of return after fees and maximum CESG). That’s close to enough to cover tuition, books and accommodations for a four-year university program in another city, and more than enough for a local school.
The RBC study cites a poll of university grads that looked at how various life goals are affected by student debt. Not saving enough for emergencies was mentioned by a little over half of participants. Next, and mentioned by almost half of survey participants, was delayed home purchases.
Worried your kids won’t be able to afford a house? One thing you can do to help as a parent is make sure they graduate debt-free from college or university.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, June 26, 2018