Using RESP to Prevent Student Loan Debt

This post is geared for my Canadian readers. They have a special program, called RESP where individual can deposit money for their future need of child education. In US state govt. offer similar programs. Wish we had a child and we were saving for his/her education as we speak. But, readers if you live in Canada and are parent, this post may come in handy for you. Enjoy the post!

If you have children, the prospect of paying for their college education may seem overwhelming. So many students are now graduating from college with tens of thousands of dollars in debt from school loans, and it is natural to want to spare your children that sort of burden.

While it’s always a good idea to set aside ordinary savings for the purpose of college, which you can then pass on to your kids for other purposes if they absolutely decide that college isn’t for them, one excellent way to ease the financial burden is to invest in a Registered Education Savings Plan, otherwise known as a RESP.

The government offers a number of grants to encourage people to put money in RESPs, and depending on your own situation, there are many different options that may be available to you if you want to enroll in such a program. While it is never too late to do so, the earlier you start, the better.

For instance, if you were to contribute $200 per month to the program when your child is a year old, you will accumulate $45,000 in savings by the time he or she graduates from high school. By contrast, starting when your child is 10 years old will only yield about $25,000 (amounts and gains are hypothetical, to show the power of compound interest).

You can use an RESP calculator to calculate a more accurate estimation of how much you can save for your child. The calculation takes into account your annual income, the number of years you expect to save and, how much you’ve already saved.

The interest is compounded until the child turns 18, and no tax is charged on the money until it is taken out so it can be used to pay for college expenses. At this point, tax will kick in, but it will be the student’s responsibility and will be at a lower rate than usual.

For every child, you can earn up to $50,000 this way, and that is enough to pay for all four years of college at some institutions. Even if your child decides to attend a very expensive college, that money will still be a big help.

With college costs rising all the time and the job market becoming increasingly unpredictable, it is a very good idea to be prudent about providing for your children’s education. RESPs are safe investments that pay well, and once you’ve gotten used to paying into them, you will barely notice the monthly withdrawal but you and your children will be very grateful for it when the time comes to go to college.