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RESP, RRSP or debt: What’s the best way to pay for university?

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RESP, RRSP or debt: What’s the best way to pay for university?

Most parents look forward to September as the time they can get their kids out of the house and back to school.

However, for parents paying for all or part of their child’s university education, September can also bring dread

That’s when fees for tuition, books, housing and meal plans are due, on top of the family's other household and living expenses. That doesn’t include the money they’re supposed to be setting aside for retirement.

A recent poll commissioned by CIBC says Canadian parents, on average, are willing to pay for about two-thirds of their child's post-secondary education, but only 30 per cent have a plan to cover it.

A separate CIBC poll also shows that 36 per cent of Canadian parents with children under the age of 25 will have to delay retirement because of the cost of helping their children pay for their education.

What’s more, 33 per cent of parents surveyed said they’ve taken on additional debt to help pay for tuition and other expenses. Sixty per cent say they’ve saved less for retirement than originally planned, directing the money instead to their child's education.

It’s the reality today, especially considering the cost of tuition is climbing faster than the rate of inflation.

Still, experts say there are strategies for both parents and students to help get ahead of the growing cost of post-secondary education.

Draft a plan, do it early

It sounds preachy, but the first thing to do is make a plan. Any decent financial expert will tell you this and -- just like your mother was right about not licking the frozen steel fence post -- they’re right.

"Saving for your child's education is just like saving for your retirement - the sooner you start, the more time you'll have, and the more manageable your monthly contribution will be," said Christina Kramer, an executive vice president at CIBC.

Everyone’s investment goals are different, but most advisors recommend parents take advantage of Registered Education Savings Plans (RESPs), because of the Canada Education Savings Grant (CESG) that comes with it.

The federal government adds between 20 to 40 per cent of the contribution to the RESP, depending on the contributor's income. The amount could be up to $600 per year with a lifetime maximum of $7,200 per child. For low-income families, the government also offers the Canada Learning Bond, which is a $500 contribution that the federal government deposits into an RESP. A child may then be eligible for another $100 per year, until he or she is 15 years old. Parents don’t have to contribute any of their own money to receive it.

Of course, that money won’t likely be enough, which is why parents should consider a few strategies to prioritize their savings.

Carey Vandenberg, a B.C.-based financial advisor with C.E. Vandenberg & Associates Inc., says parents need to weigh their income and savings and what they plan to spend in the future, including on their child's post-secondary education.

After a comprehensive future-spending predictions,  Vandenberg's clients sometimes find it’s not necessary to max out all of their investments, such as RESPs, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).

“Most people don’t have to maximize their RESP if they start early,” Vandenberg says.

For those who can't put money into everything, there are strategies to make the most of what you can afford.

Take the difference between investing in an RESP for your child, or your won RRSP. Using an example of someone earning $120,000 in B.C., Vandenberg says the tax credit on an RESP is about 20 per cent, while a tax savings on an RRSP could be more than double that. That simple comparison makes the RRSP a better investment.

Don't sacrifice your retirement to save for university

Another strategy of course is to use the tax refund an RRSP might help generate and use it towards an RESP.

If it comes down to your child taking out a loan for school and a parent putting money towards retirement, Vandenberg says choose the RRSP. That’s because the student loan is interest free while the child is in school, four years when money can be growing in your RRSP.

What’s more, the child has their entire working life to pay off their debt, while parents have a shorter time span to save money for their own retirement.

“If you have to make the choice, let your kids take care of themselves and pay for their education, or more than you, in a perfect world, may like,” he says.

For children who do have to pay for their own education, it’s a good idea to start saving early and building up a credit rating to get access to a credit card or potentially a student loan when it's time to go university.

“If you’re going into post-secondary education, you should be focused on your education, not on your bank balance,” says Mike Henry, a senior vice president at the Bank of Nova Scotia, who also advocates starting with a plan.

Henry says students need to figure out the difference between “needs” and “wants” leading up to and during their post-secondary school years. That includes everything from deciding whether to study and live at home with your parents, taking a part-time job during school, or buying new or used textbooks to save a few bucks.

Students can also advantage of specialized bank accounts, lines of credit, and credit cards geared towards students, which often come with lower fees and other incentives. And don't forget the power of free money: Scholarships, grants and bursaries are available to students at all levels of study.