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!
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 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!
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.
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.
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)?