HIGH NET WORTH PLANNER, TD WEALTH
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 kids, however, may find it especially daunting. Disruptions due to COVID-19 mean many college-bound kids have had their final high school terms interrupted. And, while it’s still too early to predict, it appears that some of those who should be looking forward to moving away in the fall may end up starting university from their own bedrooms.
Amid all this uncertainty, parents are also facing the fact that issues as volatile markets may have disrupted funds within their children’s Registered Educations 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 family RESP, you may not be alone. Here are some things to consider.
What should I do if the value of my kid’s RESP has fallen?
Right off, everyone’s situation is different, so I want to be clear that you should have a discussion with a financial professional about your own unique outlook. Also, if your kid is more than five years away from university or college you may not need to worry — your investments should have time to recover. But I can think of two situations where you could have been sideswiped by the COVID-19 pandemic when your child was close to finishing high school or in the middle of post-secondary studies.
The first scenario is that you had enough funds in the RESP for a few years’ tuition before the pandemic happened. It’ll take time for your funds to recover — and some economists believe things will improve should the economy begin to reopen in late spring.1 Fortunately, time is what you have because tuition payments for the final year are not imminent — future investment returns (and your contributions) may be enough to restore your RESP to a healthy value.
The second scenario is that you had insufficient funds for school to begin with, and the drop in the market may have exacerbated the problem. In this case, you might want to look at scholarships, bursaries and student aid — plus wages from a student’s summer job — to help out. There are also relief programs available: I’ll explain more on those shortly.
If you do decide to borrow money temporarily, ensure you don’t get overburdened by high-interest rate loans. Tapping the Canada Student Loan Program (CSLP) may be your best bet. There are proposals on the table to change the CSLP which will make eligibility easier and allow for greater amounts to be borrowed. 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 dependents and students with a permanent disability.
If I withdraw funds to pay for tuition and the semester is cancelled, can I re-contribute?
The bad news is that, 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 September is still a few months away and everyone is hoping to be back to school by then. Moreover, except for brief disruptions, many university classes have continued — with remote lectures — through the winter term and into the summer term. So while university and college life for your scholar may be a totally different experience that anyone had imagined, the schools should remain open.
My kid 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 is yes. Many people plan to pay for each year’s tuition and living expenses using a combination of a RESP and a student’s wages. That way the RESP funds can continue to accumulate and continue to help out during the length of post-secondary education. This year may be a difficult summer for students as jobs are scarce, but if you have been saving for years in the RESP, and tuition has to be paid, it makes perfect sense to use the RESP money regardless of whether your student can help with the tuition or living expenses.
But what happens if you exhaust the RESP funds early leaving a shortfall down the line? You can continue contributing to the RESP, maybe even increase your contributions and 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 them in just a couple short years. A financial professional can help you decide the best course of action.
Students should also look into various relief programs the Government of Canada has established. It has introduced the Canada Emergency Student Benefit (CESG) to provide income support of $1,250/month ($1,750 for those who have a dependant or a disability) to post-secondary students who have lost work opportunities due to COVID-19. High-school graduates who will be joining a post-secondary institution also qualify.
In addition to the CESG, the Federal government has also announced a new Canada Student Service Grant which is expected to provide up to $5,000 to support a student’s post-secondary education costs in the fall. Once more details are released, you may find that your child qualifies for this grant and thus, alleviates some of the financial pressures of drawing money from a depleted RESP.
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 are a great way to grow funds tax-free 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 great growth spurts in the market — or worse, you might not have enough money to fund the costs of school when the time comes.2 Besides, while no one can see the future, 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 kid is still a long way from going off to university or college. Depending on your investment outlook, the gains to be made from getting into the market now, to pay for the high bills of future education, may outweigh the short-term problems of 2020.
Chris Gandhu provides advanced financial, tax, estate and business succession planning for business owners and high-net-worth families at TD Wealth. Chris has particular expertise in cross-border estate planning, helping Canadians with U.S. connections deal with estate, trust and tax planning issues.
- D Economics, North American Forecast Update: Data Confirms Scale of Economic Collapse, April 20, 2020, accessed April 30, 2020, economics.td.com/domains/economics.td.com/documents/reports/forecast/NorthAmerican_Forecast_Update_Apr2020.pdf ↩
- The Power of Staying Invested, TD Asset Management, 2018, accessed April 30, 2020, www.tdassetmanagement.com/document/PDF/news-insight/Power_Staying_Invested_en.pdf ↩