September means back to school; and for clients who are either saving for their kids’ post-secondary education, or whose kids are currently enrolled in such an institution, there are a couple of simple ways to reach out to them this month with some helpful tax tips.
Saving for education
By now, it’s pretty safe to assume that in the just more than 15 years since the launch of the 20% matching Canada Education Savings Grant (CESG), almost every client tries to contribute the bare minimum contribution of $2,500 to a Registered Education Savings Plan (RESP) annually for each child to access the $500 in CESGs.
Yet, for parents who can afford to do so, you should encourage them to contribute a larger, lump-sum amount up front to maximize the tax-deferred compounding inside the RESP. After all, the maximum lifetime contribution is $50,000 per child and, in almost all cases, when the funds are withdrawn from an RESP, no taxes will ever be paid. That’s because the parents’ contributions come out tax-free and the income, growth and CESGs, while theoretically taxable to the student in the form of an Educational Assistance Payment, will almost always be sheltered by the student’s basic personal amount and tuition, education and textbook amounts.
Budgeting during school
Students often need to borrow money to cover the cost of post-secondary education, particularly those living away from home or studying a specialized program. A recent poll commissioned by Canadian Imperial Bank of Commerce found that half of Canadian college and university students must borrow to pay for their education. Most students are optimistic that they will repay their debt within five years; yet, the majority of them said they expect to graduate with debt loads of more than $10,000. Furthermore, four in 10 expect to owe more than $25,000 by the time they graduate.
While students are in college or university, we should encourage them to take the time to review their finances and build a manageable debt repayment plan so that they won’t feel so financially stressed in school and can better manage debt once they’ve graduated.
To this end, we need to promote the idea of a realistic budget for the school year. Having a financial plan in place can help students make the most of their resources, both while in school and after graduation. Students can set up alerts for their credit cards to track spending electronically so they can stick to their budget by allowing them to set a budget limit on each spending category on their credit card, and be notified by phone, e-mail or online message when they exceed their customized budget. This can help them minimize their spending while in school and ultimately, the amount of student debt they will have to start paying back upon graduation.