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Practical Tips To Best Utilize RESP Savings And Control Student Debt With Aurele Courcelles, Director of Tax and Estate Planning at Investors Group

This article was included in the Wealth Builder Carnival

According to Statistics Canada, university tuition fees in 2009/10 were up 3.6 per cent to an average of $4,917 and compulsory fees (such as student services fees, administrative charges, athletic and recreation fees) for Canadian students increased 6.8 per cent from the year before to $749. On top of this, student living costs for rent, transportation, food etc. can range from $500 to over $30,000 depending on where they go to school. This past year student debt hit an all time high exceeding $13 billion in Canada.

The Canada Millennium Scholarship Foundation found that the average level of debt for a student with a private loan in Ontario is $7,500. This costs students an average of $108 per month or $1,296 per year to service their debt. Working part-time at minimum wage in Ontario, it would require roughly 5.5 hours per week during school just to cover the interest payments.

According to Investors Group financial planning expert Aurele Courcelles, despite job market conditions and costs stacked against college and university students, current students can take steps to limit their student debt and accomplish their financial goals.

We are very excited to present our interview with Aurele in which he discusses ways to control and manage your student debt.

Biography: As Director of Tax and Estate Planning, Aurele is responsible for providing advanced taxation and estate planning support and developing and delivering training for Investors Group Consultants. His areas of expertise include tax and estate planning for individuals and for private businesses.

Aurele obtained his Diploma of Business Administration (Honors) from St. Boniface College in 1989, his Certified Management Accountant designation in 1992, his CFP designation in 2000 and completed the Canadian Institute of Chartered Accountants In-depth Tax Course in 2003. Beginning in 1989, he worked in the Winnipeg office of the public accounting firm of Coopers & Lybrand (now PricewaterhouseCoopers) primarily in the areas of small business and taxation. He joined Investors in 1996.

Q: How does one plan for and budget their way through school? Is this a lengthy process? What are some steps or safeguards that one should think about putting in place to avoid veering off the plan and budget put in place?

A: The best way for a student to manage money is to sit down and draw up a budget. Each student will need to find the budget system that works best for him or her, whether it’s a detailed plan or a few simple techniques. There are three basic steps to budgeting, no matter what system is used:

  • Estimate total expected income for the period, including savings, scholarships, bursaries, job earnings and family contributions.
  • Estimate expenses especially the so-called “soft” expenses such as entertainment. Some expenses like tuition and fees are fixed and should not change throughout the year; other costs such as transportation and personal expenses, like entertainment and food, will vary but are controllable. These are discretionary expenses and should be closely monitored. The student should also be aware of which expenses have to be paid in full (and when) and which can be paid by installment.
  • Keep a record of actual expenses to have an accurate picture of where money is spent and adjust the budget (and spending) accordingly.

Before applying for a loan, a student should contact their prospective schools of choice about scholarship and bursary awards and should apply for any type of non-repayable funding assistance they think they may qualify for. It’s also a good idea to check foundations, religious groups, service clubs or civic groups that may provide scholarships.

Q: Can you give us some tips and advice on how to best utilize RESP savings?

A: A RESP allows savings to grow tax-free until your child enrolls in a qualifying post-secondary education program. Anyone can each establish an RESP for a child, but total contributions on behalf of a particular child may not exceed $50,000. The Canadian Education Savings Grant (CESG)* is a federal program that provides a matching grant for each RESP contribution made for an eligible child. It is generally worth 20% of the first $2,500 of annual contributions ($500/year), but depending on family income and prior contribution history, could be worth up to $1,100/year. The maximum CESG that can be earned by any one child is $7,200.

You can authorize “Educational Assistance Payments” (“EAPs”) from the RESP to the student beneficiary as soon as the student enrolls in a qualifying full- or part-time post-secondary education program. EAPs consist of government bonds and grants and plan accumulated earnings; they do not include contributions. EAPs are taxed to the student beneficiary, who will usually be in a low tax bracket. EAPs must be used to further the student beneficiary’s post-secondary education.

You can withdraw your RESP contributions tax-free at any time for any purpose, but if you make withdraw contributions at a time when your student is ineligible for an EAP, you will be required to repay CESG and perhaps other provincial/territorial grants*.

When making EAP withdrawals, parents and the student should consider the following objectives:

  • Minimize income tax to student beneficiary.
  • Ensure all income is paid out as EAP while the student is in school.
  • Avoid repayments of CESG.
  • Ensure all CESG is used.

To achieve those objectives, the parents and the student should consider the following strategies:

  • Withdraw income (by way of EAP) before withdrawing contributions. It is generally better to withdraw income as an EAP as the student is likely in a lower tax bracket than the subscriber,
  • Spread out the EAPs over the expected length of the educational program instead of taking it all at once. This takes advantage of the student beneficiary’s (presumably) low marginal tax rates over a number of years, instead of giving the student a huge income inclusion in the first year. Obviously, if you know that the program will only last one year, this strategy is not applicable.
  • Avoid withdrawing contributions before the student begins school. Otherwise, you will trigger a repayment of CES grant.
  • Avoid withdrawing contributions until the student is finished or nearly finished school - while the contributions are in the RESP, the growth is tax-deferred, and when withdrawn as an EAP, the growth is taxable to the lower-income student.
  • Withdrawals of income and grant must be used as an EAP for the benefit of the student.
  • Consider all of the student’s reasonable educational and living expenses, not just tuition.

*The Canadian Education Savings Grant and Canada Learning Bond are provided by the Government of Canada. The Alberta Centennial Education Savings grant is provided by the Government of Alberta. The Quebec Education Savings Incentive is provided by the Government of Quebec.

Q: What are some ways to protect and use your credit wisely while in school?

A: It is very possible that banks and card companies will be on campus to sign up students for credit cards, even before the first class. Used responsibly, credit cards can be helpful in an emergency and for establishing a credit history. It’s best to compare features from several different issuers, including interest rate and fees, before selecting one card. It’s not normally necessary for a student to have more than one credit card. The student will have to decide if the card will be used for routine purchases or only for emergency purposes. Regular purchases on the card should be part of the monthly budget, and the student should get in the habit of paying the balance in full each month.

Q: What are some smart ways to pay down debt?

A: The debt that has the highest interest rate should be targeted for repayment before any other debt. Used responsibly, credit cards can be helpful in an emergency and for establishing a credit history. Unfortunately, credit cards also typically charge fairly high interest rates if balances remain unpaid. Repaying this debt as soon as possible at the expense of extra payments on lower interest rate debt would likely make sense.

Q: Debt can be a good and/or bad thing; can you talk to us about the cost of carrying debt over the long term and the implications?

A: Aside from the cash needed to repay the debt, carrying debt over the long-term can expose the individual to the risk of interest rate increases. Carrying debt can also limit cash available for emergencies or cash available to take advantage of certain investment opportunities.

Q: What would you say about the importance of learning financial planning at an early age? How/What do you propose should be put in place for everyone to learn financial planning at an early age?

A: Learning financial planning skills at an early age helps develop sound money management skills for later in life. Developing good habits early can help save time and money later in life.

Thank You, Mr. Courcelles!

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