Lack of flexibility a big problem with Scholarship RESP Plans

November 1, 2010


In The RESP Book (review here), Mike Holman points out the reasons why parents should avoid Scholarship / Pooled / Group RESP plans:

Very, Very expensive. There are large upfront sales fees paid to the salesperson, which are paid from your contributions, and very high ongoing fees. They have restrictive rules that can mean getting less money out of the plan if the child doesn’t go to school.

In my opinion, the biggest and loudest complaints arise from the lack of flexibility in Scholarship RESP plans. First, a lot of parents sign up without fully realizing that they are committing to contributing regularly to their child’s RESP and if they miss contributions all they might lose the Government grants, earnings on their contributions and initial enrollment fees. By contrast, a parent can choose to skip a contribution or two to a RESP held at a bank or discount broker and resume contributions at a later date.

Some parents stick with the contribution schedule until their child is in University and then find out that Group RESP rules are more restrictive than Government rules that deal with RESP withdrawals. One parent found out that his child does not qualify for payments because he switched to another program in the same University. Another found out that her child does not qualify for payments because of a strike at the University. Or heaven forbid, a child should fall ill and miss a significant chunk of the year.

Group RESPs would probably work well if life follows a carefully scripted plan. Unfortunately, stuff happens and then we find out that Group RESPs were not such a great idea after all.

Book Review: The RESP Book

November 1, 2010

[Book Cover of The RESP Book]

Compared to Registered Retirement Savings Plans (RRSPs) or even the relatively new Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs) are a low priority for the mainstream financial institutions. The reason is quite simple: relatively speaking RESPs are small fry for the big financial institutions. While Canadians hold more than $600 billion in their RRSP accounts (2005 figures from The Wealth of Canadians report by Statistics Canada), the total value of RESP accounts is just $26 billion (2009 figures from the Canada Education Savings Program – Annual Statistical Review 2009). This mismatch is also reflected in books: a number of RRSP books are published every year but to my knowledge, there are no books covering RESPs.

Mike Holman who writes the Money Smarts Blog has filled this gap by penning a valuable resource on RESPs. The author starts off by explaining the unique and sometimes complicated rules governing RESPs. He then talks about the main reason RESPs are the best way to save for a child’s education for most people: the various grants available from the Federal Government and additional grants that Alberta and Quebec residents may be eligible for from their provincial governments. The final chapters deal with how to open a RESP account and how to invest the contributions and grants.

To be honest, most of the information available in the book can be found scattered between Government websites, newspaper articles, blog posts and forum discussions. But frazzled new parents will likely appreciate that the author has put everything together in one slim volume. And hopefully most readers will take the author’s advice and open a self-directed or bank RESP. Or at least opt for a Group RESP after carefully considering other options available to them.

The RESP Book: The Complete Guide to Registered Retirement Savings Plans for Canadians is available from for $15.99. It should be noted here that a review copy was provided by the author. I should also mention that I’ve personally known Mike for many years and consider him a friend. You can find links to more reviews of The RESP Book on the Money Smarts Blog. The Globe and Mail recently published an excerpt from the book.

Cost of a Future University Degree: $92,369

October 28, 2009


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.