Generation Z, Kids and money, Life, Money

Why I DON’T Pay For My Kids’ Tuition Even With An RESP!

I know it sounds pretty messed up! What do you mean you don’t pay for your kids’ education and you have RESP money (529 plan equivalent but better)? Isn’t it why you set up an RESP in the first place? So you can help your kids financially when they go to college or university. Well that was the original plan but things do change. Find out why I DON’T pay for my kids’ tuition, even with an RESP!

The Original Plan!

Shortly after my first daughter was born, my husband and I set up her RESP so we could start saving money for her future college education. When our second daughter was born, we switched to a family RESP and diligently continued to contribute to each of our kids’ RESP bi-weekly (we added my son a few years later). The government contributes an additional 20% Canada Education Saving Grant (CESG) so it is a good incentive for parents to set up an RESP and save for the future. Who doesn’t want free money? (As long as they go to college/university!)

The plan was pretty straight forward. We would keep contributing until it was time for them to go to university, at which point we would use that money to pay for all or part of their tuition. Really simple!

Check out my previous post about the right steps to take towards Financial Independence: You CAN reach FI without a master plan!

The Reality

But, as time went on, I heard so many stories about kids switching programs several times or just dropping out, I got a little worried money may get “wasted” along the way. In general, my kids are very responsible, but was I making it too easy for them? We worked hard to save for their education and now I was having second thoughts. Somehow they needed to have skin in the game too!

The Proposal

The issue was not the cost. Tuition in Canada is a lot less than in the US and both my daughters decided to stay in town (different universities!). But I didn’t want them to be able to make decisions without any consequences. I had to come up with a plan! So I did:

  • They pay for their tuition or partial tuition (if the cost is really high).
  • If they study out-of-town, I help pay for food and lodging.
  • I will pay back the tuition upon graduation. No graduation? I keep the cash! (In theory, hoping I don’t have to deal with that part).
  • If, at any point during the program, it becomes overwhelming to have to work and study, we will reassess. There is no manual on how to do everything right as a parent so you need to give yourself room to adjust as needed, in case things don’t work the way you expect them to!

Tough Love?

Sometimes I think you need to. I see how well both my daughters are doing and I feel it was the right decision. They are definitely aware of the cost of their education.  My oldest one is graduating this year from her four-year programs and the money will be all hers then.  They are learning to manage their time and money in a way they wouldn’t have if I paid for it all right away.

They both work part-time jobs to pay for their tuition, they also pay for their own clothes, entertainment and travel (except family trips).

In work hours, assuming a minimum wage of $12/hr (in Ontario the minimum wage just went up to $14/hr) and an average of $7,500/year towards tuition, they need to work 625 hrs/year or 12 hrs per week. Considering they have 4 months in the summer where they can work full-time, it is not unreasonable to expect them to contribute at least that much! If they work full time all summer, they don’t even need to work for the rest of the year.

All kids are not created equal! When it was time for my middle child to start university, at first, she told me she wouldn’t go if I wasn’t going to pay for it. But after several more discussions, she finally “bought” into it.

It is critical to have money conversation with your kids on a regular basis, explain your thought process and get their feedback.

The Process

I have joint accounts set up with both my daughters and I transfer the “tuition” money every year out of the RESP into the joint account. I don’t want to take the risk of losing the grant money if I forget to take it out!

Why A Joint Account?

It is a good incentive for them to see the money going into the account and watch it grow. So far it’s invested in low-cost mutual funds. The money can’t go into a Tax-Free Savings Account (TFSA) until it is theirs only (not joint).

The other reason is to make sure if something was to happen to me, the money would already be theirs to keep.

Any Issues So Far?

Sometimes they work too much! My oldest has two-part time jobs and I often have to remind her to slow down a bit and enjoy her youth! (No worries, she does relax in the summer, she goes away for three weeks at a time and will be going back to Hawaii for the third time this year! I just wish she would slow down during the year a bit)

Higher income tax rate for the kids! A combination of lots of work hours and RESP withdrawals can increase their income tax rate, even with their tuition deduction. Something I didn’t think about when we were contributing to their RESP… the tax impact when they work!

Restrictions Once They Graduate?

This is another area where not everybody would agree but there are no restrictions. They can do whatever they want with the money! That’s right, I have no rules once they graduate. As far as I am concerned they “earned” it.

Am I not worried they may waste the money then? Yes a little but I am hoping I taught them well enough about money over the years and realizing it is 4 years of their hard work, they may not waste it. They have to learn on their own too!

My middle one will probably use the money to help her pay for her master’s program. My oldest one is still not sure so she may invest it for now.

Why Don’t I Just Keep The Money?

The intention is still to help them out, even if the rules changed a little, and it is NOT MY money to keep. I (we) contributed to their RESP for the last 18-20 years and Dollar Cost Averaging (DCA) has worked out great for us. So far we only spent some of the CESG and the growth, NONE of the principal (which I could take back if my kids don’t need it). Second and most important reason is that it’s not what my husband and I had in mind when we started the RESP and it would be wrong for me to keep OUR kids money, now that he is gone.

Final Thoughts

So this is how it works for us. Once my daughter graduates this year, I will remove my name from the joint account and it will be all hers! Being 21 with $30,000!

While I don’t pay for their tuition now, we did take full advantage of the RESP benefits (the grant!) and it will benefit my kids once they graduate. No debt and lots of savings! But most importantly they are learning the value of money and time management.

I am planning to do an interview with my oldest daughter when she graduates to get her side of the story. My kids are usually brutally honest so she won’t sugar coat it!

So what do you think, I am defeating the purpose of having an RESP or do you see the value in what I am doing? Do you have any questions you would like me to ask my daughter(s)?

37 thoughts on “Why I DON’T Pay For My Kids’ Tuition Even With An RESP!

  1. My dad didn’t pay for my college education, even though he could have. I’m glad he didn’t, honestly! My husband had his college education bank rolled by his dad, and it caused him to slack a lot. He didn’t have to work hard, because no matter what grades he got, his dad would just spend more money. I had to work to keep my scholarships.
    Granted, at the time, and when I had student loan debt, I was bitter a bit haha!

  2. I’m not sure if college will be a thing in 30 hears but I rather do what you do and offer them a parent loan with specific instructions and understandings. I like that you assessed what your kids are in terms of responsibility and character. This is going to be highly dependant on the child. My friends parent did something similar to her brother but he was a wreck before, he was one during and he crashed and burn after. Except the parents paid for the crash and burn when he should have dealt with it alone.

    1. Assessing what your kid can handle is a big part of it. My three kids have totally different personalities and one of them has struggled with dyslexia so I can treat them exactly the same.

  3. I agree. I was in post secondary for 10 years. My parents helped with the first degree but it was on me after that. I worked nearly full time throughout my entire education. This definitely made me value my education and all of the decisions I made in school. It also taught me how to manage my time, the importance of staying organized and the value of a dollar! Working so much also allowed me to graduate completely debt free.

    Great post!

    1. It’s great to get the perspective from someone who has gone thru it. Glad to see it had a positive impact on how you have become. Thanks for sharing:)

  4. That’s a great strategy you have for your kids. It’s a great motivational factor for them to graduate and along the way they are able to understand the concept of money and importance of how to handle it. In terms of the logistics, don’t you have to use the funds in the RESP to pay the tuition directly to the university or am I missing something?
    I also had to pay my tuition during the latter part of my undergrad school(my parents paid for my first two years in college) and my grad school. This really taught me that I needed to be organized with my finances because it took me a while to finish paying my student loans for my grad school.

    1. I was surprised too but no you don’t need to to pay the tuition directly and you don’t even need to justify how much you take out! All you need is proof they are enrolled.
      Thanks for sharing how it worked for you too:)

  5. This is a great idea Caroline! So this is how your daughter has $30K at the age of 21! Thank you for sharing your strategy- it’s important that they don’t waste that money because students don’t realize how easy they have it- no responsibilities! I worked throughout college and it helped me learn time management and responsibilities whereas my siblings did not work throughout college and they still have a bit of an entitled mentality. I was lucky enough to get scholarships for tuition so it was paid for, but my parents would have paid for the tuition.

    1. Yes that’s how she saved. She even admitted the other day, she wouldn’t have that money if she worked and didn’t have to pay for her tuition.

  6. My mom doesn’t pay for my education either, although she offered. I was torn between two universities- one super expensive that my parents would’ve have to part pay or a cheap one that I could pay myself. After a lot of thought, I went with the cheap one and everything so far has been awesome. Mom still helps out a lot though by giving me a place to live!
    Great post btw!

  7. I think that’s a great approach. My husband and I discussed about this and we currently don’t have any kids.
    Unlike our parents, we will also encourage trade schools as alternatives and won’t force them to attend 4-year university. We most likely will do something like this to motivate the kids to earn their education. If they get everything paid for then they won’t understand the value of money.

    1. I was open to anything. I actually thought it would be better for my second daughter to go to trade school but she wanted to go to university so she did:)

  8. Thanks for sharing this great approach! I really liked hearing how each of your kids responded differently to having to pay their own way. These types of life lessons are priceless…or maybe worth about $30k!

    1. Lol, yes 30K for now! Who knows in the future. My son is planning to go out of town to a much more expensive university so I may have to share a little:)

  9. I don’t plan to have kids but one good idea I’ve read about before is to basically say; hey, I’ll pay tuition for the local state school(not the best one even, just the one that costs 5-6k/semester) and you’re living at home. If you want to buy up then try hard at school and get scholarships.

  10. Love it-what a great plan! It’s clear, helps your kids be more responsible, and doesn’t reward slacking off. I’m still crafting my college plan (oldest is 14.5) but it’s likely going to involve some similar concepts.

    1. Thanks Liz:) I only came up with it when I finally realized I was just making it way too easy for them. In the US, you are dealing with much higher tuition fees so you would definitely need to craft something a little more elaborate. Can wait to read your post on the subject:)

  11. Interesting strategy and one I think I will emulate. It has never crossed my mind that giving the kids access to ‘free’ tuition money may cause them to slack? I guess it also depends on a lot of other factors, but the strategy is sound IMO. I just forwarded this link to my wife – she’s is the “softie,” so maybe this piece will get her onboard! 🙂

  12. Hi Caroline,

    I agree with your approach, I think it’s brilliant. I also like your no restrictions approach, so that they have their chance to have their own experience and learn from it. I’ll keep this in mind for when we have kids and they’re off to college. J

  13. I think this can be a great plan depending on the kids. We opted to pay directly for our kids college educations and thankfully it worked out well. But I know some friends who should have used this plan.

    1. I agree Amy. All kids are different and some of them will do just fine even if their tuition are paid in full. I would like to think my kids would have done well but wasn’t willing to take the chance:) And they are learning from the experience.

  14. I missed this post the first time around. Awesome idea Caroline! A great incentive to actually graduate! We are doing a 529 for our boy but not going too crazy with it. I really like your setup here.

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