The Lifelong Learning Plan

By the third year of her PhD program at York University in Toronto, Sam Ladner needed a new way to pay her tuition. She had already used up her student line of credit and her income as a research consultant, and found student loans to be more of a hassle than they were worth. Her boyfriend, who was once a financial planner, told her about the government-backed Lifelong Learning Plan (LLP), in which Ladner could borrow funds from her registered retirement savings plan.

"My RRSP only had $6,000, but I had tapped out all my other resources," says Ladner. "This was a way of paying for my tuition for a year without having to worry."

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More and more people are turning to their RRSP for a quick way to access fast cash. According to recent Scotiabank study, almost a quarter of Canadians have dipped into their RRSP, primarily to cover day-to-day expenses, buy a first home and pay down debt. About one per cent of the survey's respondents also used the funds to finance their education.

What is the Lifelong Learning Plan?

The Lifelong Learning Plan lets you borrow up to $10,000 a year - $20,000 for four years total - tax-free from your RRSP to pay for full-time studies for you, your spouse or common-law partner. The LLP applies only to studies at a designated educational institution - a university, college or other school that qualifies for the education amount on your tax return - and for a qualifying educational program that lasts at least three months and requires a minimum of 10 hours per week on courses or school work (not including study time). If you are disabled, you can use the LLP even if you are enrolled in a part-time program.

What does it mean for my investments?

"By taking the money out of the RRSP, you are going to reduce the amount of the RRSP over time, even if you do make the repayments over the repayment period," explains David Ablett, manager of advanced financial planning support for Investors Group. "That's because by taking out a substantial sum of money from your RRSP, you've lost the investment growth on the amount withdrawn."

Of course if you have the money, you can still contribute to your RRSP while you're studying. But hold off on claiming those contributions until you're employed; while in school, you'll likely have little or no income plus you receive education credits, so tax savings will be small. It's better to maximize your deductions when your income increases.

What are my other alternatives?

Before withdrawing money from your RRSP, says Ablett, seriously consider other financing options. "If someone is able to get a decent interest rate on a loan, maybe five or six per cent, then that might be worth looking at." He also suggests investigating the Canada Student Loan program, delving into your private savings and looking into bursaries and scholarships, information for which should be available on a school's website.

Should I use the LLP?

If you don't have a registered pension plan and will depend on your RRSP assets for the bulk of your post-retirement income, you aren't the best candidate, as you could be more adversely affected by the loss of investment growth, explains Ablett. You should also stay away from the LLP if you won't be making enough money post-education to make the repayments, because you will be taxed yearly on the amount you didn't repay to the LLP. According to the Scotiabank study, 20 per cent of people who use the Lifelong Learning Plan or Home Buyers' Plan do not plan on repaying the money despite interest charge penalties. That said, if your educational program will help you earn more money in the future, then you may be able to recover from the loss of RRSP growth because you'll increase your contribution room.

How do I repay the LLP withdrawal?

In most cases, repayment begins five years after the first withdrawal, says Ablett, and the repayment period is 10 years long. The normal repayment amount is one-tenth of the total withdrawn. When making your annual RRSP contributions, don't forget to designate the portion applicable to the LLP repayment; otherwise, you'll be taxed on that amount, adds Ablett.. "In a future year, you cannot go back and reclaim that amount that you had to pay tax on. So in effect, only by making the payments according to schedule will that make it a tax-deferred withdrawal."

You can also accelerate your repayments or pay the outstanding balance as a lump sum. But it may be more advisable to pay your minimum LLP amount and maximize your RRSP contribution to get the deductions and try to regain the lost RRSP growth.

For more information, visit the Canada Revenue Agency. To make an LLP withdrawal, complete Form RC96 with your RRSP issuer.