Going to university or college can be a challenge for students and financially tough for families during the best of times. This year’s cohort of students may find it especially daunting. Disruptions due to COVID-19 mean many post-secondary-bound children have had their final high school terms interrupted. And it appears that at least some of those who would have been looking forward to moving away in the fall may end up starting school from their own bedrooms.
Amid all this uncertainty, parents are facing the fact that volatile markets may have adversely affected funds within their children’s Registered Education Savings Plan (RESP). With job disruptions, stress over self-isolation and general uncertainty, few of us have extra time or energy to worry over RESPs. If you have questions about your education savings, you may not be alone. Here are some of the things you may be wondering about.
What should I do if the value of my child’s RESP has fallen?
It’s important to understand that everyone’s situation is different and you should make decisions based on your own unique outlook. But if your child is still some years away from attending university or college, you may have less cause to worry as your investments may have time to recover over the long term. But there may be situations where the market impact created by the COVID-19 pandemic could have reduced the value of the investments in your RESP and given you cause for concern — e.g. if your child is close to finishing high school or in the middle of post-secondary studies.
The first scenario: You had enough funds in the RESP to cover the full cost of tuition for the program before the pandemic happened but, as a result of the pandemic, the RESP value may have decreased leaving you short. It will take time for your funds to recover — but fortunately, time could be on your side, as you will only need a portion of the funds to cover school costs for the first year.
You may also consider increasing your contributions to the RESP to help make up any shortfalls and help you get back on track with your RESP goals.
The second scenario: You had insufficient funds for school to begin with and the drop in the market may have exacerbated the problem. In this case, you could consider alternatives such as scholarships, bursaries and student aid, plus wages from a student’s summer job if they have been working.
If you do decide to borrow money temporarily, ensure you don’t become overburdened by high-interest rate loans. Applying for the Canada Student Loan Program (CSLP) may be a good option. To help students facing financial challenges from COVID-19, the government increased the CSLP weekly maximum from $210 to $350 for the 2020–21 school year.1 As well, the maximum amount for the Canada Student Grant (which does not require a repayment) is now doubled for full-time and part-time students, students with dependants and students with a permanent disability.
If I withdraw funds to pay for tuition and the semester is cancelled, can I re-contribute?
Barring any changes from the government, the CRA does not currently allow any kind of re-contributions if this situation arises. While this kind of scenario may never happen, we are living in unprecedented times and it pays to have all the information in front of you.
The good news is that, with September on our doorstep, there are no signs that schools will be closed. Moreover, except for brief disruptions, many university classes have continued with remote lectures through the summer term. While university and college life for your scholar may be a totally different experience than anyone had imagined, the schools seem likely to remain open.
My child couldn’t get a job this summer because of COVID-19. Should I withdraw more from the RESP to cover the shortfall?
The short answer for many people will be yes. It’s common for people to pay for each year’s tuition and living expenses using a combination of their RESP and a student’s wages. That way the RESP funds can continue to accumulate and be used for the duration of post-secondary education. This year may have been a difficult summer for some students as jobs may have been scarce, but if you have been saving for years in the RESP, and tuition has to be paid, it may make sense to use the RESP money regardless of whether your student can help with the tuition or living expenses.
What happens if you exhaust the RESP funds early leaving a shortfall down the line? You can continue contributing to the RESP and maybe even increase your contributions to help make up the deficit in the interim. Bear in mind, it may be wise to remain in conservative investments to help protect the value of your contributions, since you’ll be needing the money in just a few short years.
With everything that’s going on, does it make sense to put a pause on our RESP contributions?
No, not if you can afford to keep contributing. RESPs can be a great way to grow funds tax-deferred to help pay for education costs. It’s understandable that you might worry about current economic conditions. But if you stop making contributions, you may miss out on any potential growth spurts in the market — or worse, you might not have enough money to fund the cost of school when the time comes. Now may be an opportune time to put money into an investment: With the markets off their highs, you may be able to capitalize on a potential market rebound. This can be especially true if your child is still a long way from going off to university or college. Depending on your investment outlook, the potential gains from getting into the market now, to pay for the costs of future education, may be worthwhile in the long-term.
What do I need to know about withdrawing from my RESP for my child‘s education?
Start early. Parents or subscribers who control the RESP should know that the process takes some planning and may involve liquidating investments, meeting deadlines and submitting forms. Because of this, it’s best to set the process in motion well beforehand. First, some housekeeping: This may be obvious, but the only person who can make a withdrawal from the RESP is the person who set up the plan, the subscriber. Second, the student will need a SIN number and a bank account in order to receive the funds from any withdrawal.
For educational withdrawal purposes, RESP funds can be withdrawn in two ways:
- Post-Secondary Educational (PSE) Capital Withdrawal. These withdrawals are from your contributions to the plan. They can be delivered to either the subscriber or the beneficiary.
- Educational Assistance Payment (EAP). These withdrawals are from the government payments into the plan (such as grants) and any income earned (such as interest) in the plan. These can only be sent to the beneficiary.
Each portion has different tax consequences but generally you may wish to consider withdrawing the earnings/grant portion (EAP) first — that way, if your child decides not to continue school, your contribution will not have been used up. Be aware, full-time students requesting an EAP withdrawal for the first time may only withdraw $5,000 before the first 13 weeks of school are completed. (The limit for part-time students is $2,500.) You must also obtain a document from the school that officially confirms your child will be attending the college or university, called a Proof of Enrolment. You must submit the completed RESP withdrawal form along with the Proof of Enrolment to your RESP provider to make a withdrawal.
- ” Canada Student Loans – COVID-19,” Government of Canada, June 5, 2020, accessed August 7, 2020, www.canada.ca/en/services/benefits/education/student-aid/notice-covid-19.html ↩