Canadian Capitalist » RESP

Cost of a Future University Degree: $92,369

Canadian Capitalist — Thu, 29 Oct 2009 00:45:03 +0000

Parents could be forgiven for going into sticker shock after reading press reports on the release of a TD Economics Report titled The Future Cost of a University Degree. Media reports gave prominent coverage to the headline numbers: an average cost of $137,013 for an undergraduate degree for a student living away from home and $101,426 for a student living at home. The Globe and Mail called it That’s one pricey piece of paper. The Financial Post headlined its column University degree may cost $100K in 18 years. Both papers incorrectly noted that these were “inflation-adjusted projections”.

Let us set the record straight. The report makes it clear that, eighteen years from now, a four-year degree would cost an estimated $92,369 in 2009 dollars for a student living away from home and $68,373 for a student living at home. An undergraduate degree currently costs $77,132 and $51,763 respectively. In other words, an university degree would cost about $15,237 more in 2009 dollars for a student living away from home, not the $60,000 you would have inferred from media reports. Granted, the actual increase isn’t exactly petty change but it can be planned for in advance:

Assuming an annual rate of return of 6.8 per cent on a balanced growth portfolio, the annual contribution to an RESP needed to cover the future cost of an undergraduate degree is $2,475 for students living away from home and $1,725 for students living at home. Alternatively, parents may wish to use a Tax Free Savings Account (TFSA) to ease the burden on saving. The annual contribution to a TFSA would need to be $2,900 for students living away from home and $2,150 for students living at home.

So, take a deep breath and relax. Yes, a university degree might become an even more expensive proposition but it is an investment that will still produce satisfactory returns in the form of a higher paycheque. You can plan for it in advance but if you are unable to cover or save for the increase, students can pitch in through summer jobs or co-op terms.

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How to invest periodically in a TD e-Series Funds RESP Account

Canadian Capitalist — Mon, 09 Mar 2009 03:33:02 +0000

Reader Tim managed to jump through the hoops to set up a TD Bank e-Series Funds RESP account for this two children and has the following question:

My plan is to invest approx $100 to each of the 2 plans every two weeks in order to qualify for the maximum government match. I want to take advantage of dollar cost averaging but the problem is that there seems to be a minimum of $100 investment for each of the funds. I was hoping to diversify between 4 e-funds but it would seem I have to invest more money or invest less often in order to do that.

As I tend to invest a lump-sum amount into our kids’ RESP, I don’t have experience with investing regularly in a RESP. But I think Tim can invest regularly by setting up a Pre-authorized Purchase Plan for the TD Money Market Account. A Pre-authorized Purchase Plan (PPP) allows investors to invest as little as $25 on a regular basis — from as often as every week to as infrequent as once a year. The PPP can be set up for purchasing $100 of the TD Canadian Money Market fund for each of the two accounts. Every other month (or so), the account should have enough contributions plus CESG payments in the money market fund to switch into other e-Series mutual funds. Use this automatic rebalancing spreadsheet to figure out how to divvy up the holdings in the money market fund.

Another option is to set up a PPP for each of the e-Series mutual fund in your portfolio. If you are planning on purchasing four e-Series funds, you’ll set up a contribution of $25 (the minimum required for a PPP) for each fund for a total of $100. The CESG is deposited into the account in a money market fund and can be used to rebalance the portfolio, say once every year. Note that all the PPP purchases made on the same day in one account show up as one transaction in the chequing account. I’d like to hear your opinion if you have set up a RESP account and invest in it regularly.

[Note: The original post incorrectly mentioned that each mutual fund purchase via a PPP is treated as a separate chequing transaction. Thanks to readers who pointed out the error in the comments.]

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Your Turn: Setting up RESPs with Altamira

Canadian Capitalist — Mon, 10 Nov 2008 05:50:30 +0000

Despite charging some of lowest fees, the TD e-Series mutual funds may not be suitable for everyone because TD Bank RESP accounts are not set up to receive the enhanced Canada Education Savings Grant available for lower income Canadian families. Reader TS who had RESP accounts at TD sent the following note (slightly edited) about moving the accounts to Altamira (posted with permission):

After some initial confusion, I set up one family RESP account for each of my three children with Altamira and added the other two as beneficiaries. The Altamira rep was very helpful with the paperwork and even caught what looked like a mistake on my part in the transfer from TD (it wasn’t a mistake as I had transferred one kid’s amount to another on purpose to make the amounts deposited in the new accounts more proportional to the kids ages), but I was impressed that she caught it.

So overall I was pleased with Altamira, and very happy my kids will be able to receive the additional grants for which we are eligible. We have other business with Altamira and I have been happy with them because although their index fund MERs are a bit higher than TD (most are 0.5% I think), I find their online system, phone system, and monthly reports much easier to read/use. I don’t know what it is with TD as I find their reports much harder to read and track, and when I make trades within my account, it always seems harder than it should be. I know you’ve had good experience with them, and overall I am still pleased, but I am glad that I only have to call them a couple of times a year.

One more thought: Overall the RESP process just doesn’t seem that easy. My local TD banker told me that many people are missing out on all the free government money (here in Alberta each kid is eligible for $500 for just being born!) because they don’t ever set up an account. I am fairly good with numbers and have a decent investment understanding and I still found it a lot of work and confusing, so I think the government isn’t succeeding in getting the money to families who could really use it in the future. I hate seeing people miss out on good things like this. It would be interesting to know how many people do not get the grants for which they are eligible.

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The MER on Group Scholarship Plans

Canadian Capitalist — Tue, 09 Sep 2008 04:43:45 +0000

Ellen Roseman’s recent column and blog post on group scholarship plans generated a lot of comments, including the following from a group RESP seller on how the fees of group RESPs stack up against bank mutual funds:

Banks promote their family of mutual funds as the investment vehicle for just about anyone who wants to save for their child’s education with average MER’s of 2.65%. Go to a bank and ask to see for yourself, like I have. By the time junior is off to college or university, the total fees paid by the family to the bank is about 300% higher than with scholarship plans and that’s before we even calculate the erosion of compounding interest by this annual fee that is charged.

While I’ve never been a fan of high-cost mutual funds, the claim that the MER on group scholarship plans works out to 0.9% can only be justified with a lot of fuzzy math. At first glance, it doesn’t sound unreasonable: the Canadian Scholarship Trust, for instance, charges an administration fee of 0.5% and a portfolio management fee of 0.10% to 0.30% on plan assets. There are some miscellaneous fees such as depository fees and trustee fees that we’ll ignore for the purposes of this post. The total administration and portfolio fees, roughly, totals 0.90%.

The typical sales pitch is that though there is a steep enrolment fee charged initially, it is refunded partly or in full. But attention must be paid to the details — the enrolment fee refund is in nominal dollars, without any adjustment for growth and inflation. A promise to repay $200 eighteen years in the future is only worth $83 in today’s dollars at a 5% discount rate. This is a real cost that must be accounted for in calculating the MER of group scholarship plans.

I constructed a spreadsheet with the following assumptions: (1) A rate of return of 5%. (2) Annual contributions of $105. (3) An enrolment fee refund over 4 years. A self-directed RESP earning 5% would total $3,101 after 18 years. The group scholarship plan would deduct an enrolment fee of $100 from the first year’s contribution and $50 from the second and third years. At the end of 18 years, the plan should add back the present value of four future enrolment fee refund payments. The difference between the rate of return of the self-directed RESP (5%) and group scholarship plan is a fair estimation of the impact of enrolment fees:

At full refund, the group plan earned a return of 4.05%.
At a 50% refund, the group plan earned a return of 3.75%.
At no refund, the group plan earned a return of 3.4%.

So, the total impact of all the fees on a group scholarship plan is of the order of 2.15% (1.25% for the impact of the enrolment fees and 0.9% for other fees). While that compares favourably with high-MER mutual funds, it is certainly not 3 times cheaper. And parents have a much better option than having to choose between Tweedledee and Tweedledum: they can walk down the street to a TD Canada Trust branch and open a RESP account and invest in TD e-Series mutual funds for a total cost of less than 0.5%. Now, that is more than three times cheaper.

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Interesting Report on RESPs

Canadian Capitalist — Tue, 26 Aug 2008 23:09:40 +0000

After reading Rob Carrick’s article in the Globe and Mail on a study commissioned by the Federal Government on Registered Education Savings Plans, I went looking for the report. Fortunately, it is available online, provides a wealth of interesting information and explains various RESP options available to parents in a clear and straightforward manner. As Mr. Carrick has highlighted the shortcomings in the design of group RESP plans in his column, I am going to focus on interesting tidbits in the report:

Participation in RESPs is low: only 35.2% of children aged 0 to 17 years received a Canada Education Savings Grant.
The Canada Learning Bond provides $500 for low-income families to establish a RESP account and allows for an annual contribution of $100 thereafter but the participation rate is a miniscule 8%. The CLB program has paid out a paltry $24 million to date.
The biggest “complaint” against RESPs offered by banks and brokerages is that they are not “vigorously” marketed.
It is shocking that 3.2% of group RESP plans were cancelled or terminated in 2006. Even more shockingly, 1.9% of group scholarship plans were closed by the group RESP vendors and subscribers paid the price: “When the group scholarship provider closes a group plan, the subscriber can reclaim the contributions, and these are then returned net of fees and without the investment income. Closing also means the grant and bond are repaid to the government, and these cannot be earned back later if new contributions are made for the same beneficiary.”
The report notes two benefits of group scholarships: the mandatory contribution schedule may force some people to save for their child’s education and the proactive marketing of these plans may result in higher participation in RESPs.
Corporate governance of scholarship trusts leaves much to be desired and there is no disclosure of executive compensation.
The criticism that scholarship trusts have high fees is justified. The report notes that in 2006, some 20% of gross contributions went towards fees. Granted some of the enrolment fees may be refunded but the present value of the refund is quite small.
If a group RESP subscriber is unable to continue contributing, they can transfer to an individual savings plan instead of terminating the program and keep the principal, grants and income. Termination, on the other hand, will result in refund of contributions less the enrolment fee. The report points out that 1.9% of plans were terminated even when a better option is available.

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Quick Tip: Catch up on RESP Contributions

Canadian Capitalist — Thu, 03 Jul 2008 02:59:09 +0000

While chatting with a friend, I found out that it is not common knowledge that if you didn’t contribute to a Registered Education Savings Plan (RESP) in previous years, you can catch up on contributions and possibly still get the lifetime maximum Canada Education Savings Grant (CESG) of $7,200 that your child can receive. It’s hardly surprising — for many families paying down debt or saving for retirement takes priority over saving for a child’s education. If you missed contributing to a RESP, it may not be too late to catch up on past contributions and get every dollar of the CES grant.

First, a quick primer on CESG rules: (1) Starting in 1998, the CES grant accumulates every year for a child until she turns 17. The basic grant room is $400 per year from 1998 to 2006 and $500 from 2007. (2) The maximum CES grant that a child can receive in a calendar year is $1,000 provided grant room is available. (3) The lifetime CESG is $7,200.

As you can deduce from the rules, in every calendar year, you can catch up for roughly one more year of missed contributions. For example, let’s say no RESP contributions have been made so far for a child born in 2000. The total CESG room for the child is $3,800 ($400 for the years 2000 to 2006 and $500 for 2007 and 2008). If a RESP account is set up for the child and $5,000 is contributed to it, the child will receive a grant of $1,000 and have the remaining $2,800 carried over to future years. In this example, it will take another 6 years to bring the grant room down to zero.

Globe and Mail columnist Rob Carrick has written a couple of articles on RESP catch-up contributions available here and here. Note that the CESG rules are slightly different now.

[Update: You can find the unused grant room for your child by calling Service Canada at 1-888-276-3624. You'll need the child's Social Insurance Number.]

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Still Sour on Group RESPs

Canadian Capitalist — Thu, 01 May 2008 02:52:04 +0000

The more I learn about group RESPs, the less I like them. In the comments thread on an earlier post on Group RESP plans, a reader referred to the prospectus for the years 2000 to 2007 filed by the Canadian Scholarship Trust filed with SEDAR. I was initially excited to lay my hands on so much information – at last, I could compare past results of Group RESP with a self-directed RESP that holds fixed-income securities and make an apples-to-apples comparison between the two for a number of time periods in the past. The results would be interesting and hopefully conclusive.

Alas, it was not to be. While it’s possible to find out contribution information or EAP (education assistance payments that is made over four years to eligible students) information, it is hard to obtain both for the same plan. For instance, consider the 2007 prospectus. The Group RESP plan marketed by Canadian Scholarship Trust is called “Group Savings Plan 2001″. The contribution schedule is available in the prospectus and tells us that buying one unit for a newborn would cost $105 per year, for a 1-year old $115 per year etc. The oldest child that can be enrolled in the plan would be 12-years old for a contribution of $1,100 per year. While, the prospectus mentions that EAP of $600 was made for the 2006 year, the “Group Savings Plan 2001″ was offered only in 2006 and 2007, which means the oldest child enrolled in the plan in 2006 will be eligible for EAP in 2012. The Group plans offered in years 2000 to 2002 was called the “Optional Plan”, in years 2003 to 2005 was called the “Group Savings Plan”. So, it’s nearly impossible to tell how the plans have performed over the years.

The defendants of Group RESPs point out that the portfolio is invested in an “ultra-safe” manner. But, guess what? According to the prospectus for the “Group Savings Plan 2001″, about one-quarter (24.8%) of the assets is invested in index-linked notes. A fair comparison of group plans with self-directed RESPs, going forward, would be a 75% bond and 25% equity mix. I’m convinced more than ever that a self-directed RESP invested in a diversified portfolio in a low-cost manner is more flexible and almost certain to outperform any pooled RESP plan available today.

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Political Football with RESPs

Canadian Capitalist — Thu, 13 Mar 2008 10:41:32 +0000

RESPs are already the best way to save for a child’s education. In most instances, a RESP beats out other alternatives – it is better than a RRSP, it will be better than the TFSA and it is certainly better than saving in a taxable account. Bill C-253 introduced by MP Dan McTeague proposes to change the RESP by allowing taxpayers a deduction of $5,000 on their taxes but the bill is very vague in its current form. It is not clear if the tax deduction will take the place of the CESG. No details are available on whether contributions will now be taxed in the hands of the student. Which in turn, raises the question on how contributions already made to the RESP will be treated.

I do have serious doubts on whether the RESP will ever be changed such that a tax deduction will be allowed on contributions, while keeping the existing grants and rules. Not surprisingly, the Conservative government takes the view that the bill is “irresponsible” and “ridiculous” and an “abuse” of the process and included a new clause aiming to quash the bill as part of its budget motion that will be voted on today. The Liberals, the only other party with any hope of forming a government, have indicated how serious they are about Bill C-253 by planning to let the budget motion pass. But more tellingly, Don Martin wrote in the National Post yesterday that according to Liberal insiders, their campaign platform will feature a “scaled-down version of MP Dan McTeague’s registered education savings scheme”. Why scale it down? Let me guess: it’s too good to be true. And politicians wonder why they get no respect.

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TFSA versus RESP

Canadian Capitalist — Fri, 29 Feb 2008 01:03:10 +0000

Where does the introduction of TFSA to our savings options leave the RESP? Contributions to both TFSA and RESP are made with after-tax dollars and both offer the benefit of tax-deferred growth. RESPs have the advantage of attracting the CES Grant of at least 20% but the grant and all the growth within the RESP is taxed upon withdrawal, albeit at the lower rates that beneficiaries tend to pay when attending university. But RESPs have strict restrictions and face heavy penalties if the beneficiary does not attend school. If you discount the initial matching grant, the TFSA is superior to the RESP due to its flexibility.

So, the question boils down to whether the CESG makes up for the main drawback of a RESP, namely the penalties involved if a child does not attend college or university. You’ll have to determine for yourself the chances that your child will get post-secondary education but consider this statistic: among young Canadians aged 18 to 21, about 60% attended an university or college and almost two-thirds went to some kind of post-secondary institution.

If there is a very high chance that at least one child will attend University, the RESP wins out over the TFSA due to the CES Grant depending on the time horizon and the tax rate on withdrawals. I ran the calculations using the following assumptions: $36K is contributed to a RESP over 14.4 years to get the maximum grant of $7,200. The same $36K is contributed to a TFSA over the same time frame and both accounts earn a 6% rate of return. The CESG and the growth within the RESP is taxed at the lowest level of 15%, a rate that is likely overstated because students tend to receive tax deductions for tuition, education and text books. After 18 years, the RESP has a roughly 10% advantage over the TFSA. If the tax on RESP withdrawals is lower at 10%, the RESP has a 13% advantage after the 18th year. You can play around with different scenarios using this spreadsheet.

The calculations confirm my suspicion that it is more profitable to save for your child’s education in a RESP by contributing just enough to get the maximum CES grant. But it now makes no sense to contribute the maximum 50K allowed to a RESP over time. It is better to channel any contribution that doesn’t receive a matching grant into a TFSA instead.

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Investing in TD e-Series Funds for Your RESP

Canadian Capitalist — Tue, 06 Nov 2007 01:05:53 +0000

I have received a couple of emails that the process of opening a new TD Mutual fund account in order to buy the e-Series index funds described in this post is not very clear. I regret that I did not do a better job of explaining and hope to make the process clearer in this post. As an aside, I would like to point out that apart from being a shareholder in TD Bank, I have no specific financial interest in writing this post.

It is very easy to open a TD e-Series Funds Account if you are opening a RSP or Investment account. You simply print out this application form and follow the instructions in the form.

However, opening a RESP account is a little bit more complicated [Note: You'll need a SIN number for your child for opening a RESP account] because you have to first open a TD Mutual Funds RESP account and then apply to convert it into a TD e-Series Funds account. You can open a TD Mutual Funds RESP account either in person at your nearest branch or by mail. Since e-Series funds are only available online, you would need to park your initial contribution in the TD Money Market fund.

Once you receive notification that your TD Mutual Funds RESP account is open, you simply apply to have your account converted into a TD e-Series Funds Account. After your e-Series Funds Account is open, you can switch out of the money market fund and invest in a diversified portfolio of funds that reflect your asset allocation.

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