Saving for your child’s education can feel daunting, especially at a time when other costs of living are rising, too. In the next ten years, university tuition is set to rise to over $120,000 for a 4-year degree, and you may be wondering whether you’ll be able to save enough through your RESP.
You might also be curious whether the amount you save will affect what your child can qualify for in student loans should they need them, Or if there is a contribution limit for your RESP? Is there a number you need to target that can hit the “sweet spot” between what they receive in loans while reducing the overall burden of student debt for them? What if you can’t save enough to cover their entire program? Is it simpler just to let them finance their education on their own when the time comes?
The answers might be simpler – and more surprising – than you think.
RESPs and student loans
The short answer is that student loan eligibility is generally based on family income, not assets. This means when a student with an RESP applies for funding, their savings will generally not negatively impact their ability to qualify for provincial student loans.
RESPs and student loans aren’t an either/or proposition. Many students rely on both to finance their education and living expenses. RESPs are a great tool and have the potential to remove the need for loan funding entirely. Starting an RESP early and contributing often is the best way to make the most out of it’s benefits.
In a perfect world, you’ll have enough funds saved to fully fund your children’s education by the time they are ready to apply for school. However, for the students who find that there’s not quite enough savings to cover their schooling, student loans are a back-up option to meet their tuition costs.
The most important thing to be aware of when it comes to student loans and your RESP funding is ensuring that in your student’s second and subsequent years of schooling they report the RESP funding they received the previous year as income on their taxes because that can inform your OSAP funding eligibility for the following year. All RESP funding is classified as student income during tax season. That means if you report a different amount of income on your loan application than what is accounted for by the Canada Revenue Agency some OSAP funding could be clawed back if previously reported income brackets are exceeded. The last thing you want is to have to repay extra loan funding or have grants it taken back last minute.
Student taxes don't have to be rocket science.
Types of Student Loans
Student loans in Canada primarily fall into two categories: government loans or private loans. Each type offers distinct advantages and considerations for borrowers.
Government Loans: Administered by federal and provincial governments, these loans provide numerous benefits, including lower interest rates and flexible repayment plans. Additionally, government loans may offer borrowers the opportunity to apply for grants and bursaries, further alleviating the financial burden of education. In Canada, the National Student Loans Service Centre (NSLSC) manages the distribution and repayment of federal student loans.
Private Loans: Offered by banks, credit unions, and other financial institutions, private loans give an alternative funding option to students. While private loans may offer higher borrowing limits, they often come with higher interest rates and less favorable repayment terms. If you’re considering private loans, carefully weigh the benefits and drawbacks before deciding.
Applying for Student Loans
Before beginning the student loan application process, it’s crucial to understand the eligibility criteria and factors influencing loan disbursement.
Eligibility Requirements: To qualify for government student loans in Canada, applicants must be Canadian citizens, permanent residents, or protected persons. Additionally, they must be enrolled in an eligible program at a designated post-secondary institution. International students may explore private loan options or consider co-signers to enhance their chances of approval.
Needs Assessment: The assessment of financial need plays a pivotal role in determining eligibility for government student loans. This evaluation is typically conducted through the completion of the appropriate provincial or territorial student aid application, which considers factors such as family income, assets, and expenses.
Loan Amounts: The amount of student loans available to borrowers in Canada varies depending on factors such as tuition fees, living expenses, and family income. Government student loans have set limits, while private loans may offer more flexibility in borrowing amounts. Keep in mind that private loans are subject to credit assessment and approval.
Repaying Student Loans
Once a student finishes their degree or program, the repayment phase of their student loans typically begins. Understanding the available repayment options is essential for managing debt effectively.
Standard Repayment Plans: Standard repayment plans will require you to make fixed monthly payments over a specified period, typically ten years. While this option provides predictability, borrowers should ensure that the repayment schedule aligns with their financial circumstances. If your finances change and you being earning more or less money, you can request a payment change to better align with your situation.
Income-Driven Repayment Options: Canada offers income-driven repayment plans such as the Repayment Assistance Plan (RAP), which adjusts monthly payments based on the borrower’s income and family size. These plans provide relief for individuals facing financial hardship and can help prevent defaulting on your loan.
Loan Forgiveness Programs: Certain professions, such as nursing, teaching, and social work, may qualify for loan forgiveness programs in Canada. These programs offer partial or complete forgiveness of student loan debt in exchange for service in designated high-need areas or sectors.
Wondering how to qualify for OSAP?
RESPs and scholarships
Having RESPs won’t impact your child’s eligibility for merit-based scholarships, but they might affect their eligibility for some needs-based scholarships or bursaries. If the application process requires disclosing a student’s assets or savings, having a significant amount saved in an RESP may put your child out of the running.
A guidance counsellor or advisor can help your child find grants they qualify for. Focusing their energies on applying for grants they are most likely to be approved for is a good place to start. If unexpected needs arise when your child is already enrolled, they can also reach out to the financial aid office at their school. A staff member can help them find the best path forward and secure the resources they need to continue their studies.
The costs of post-secondary education can feel overwhelming, but there’s no need to worry that you can’t save enough for your child. Whatever you can put aside in an RESP will already help set your child ahead, and the Canadian Education Savings Grant will supercharge these funds by matching 20% of every dollar you contribute up to $2,500. This means you can receive up to $500 “free” every year
RESPs and government grants go hand-in-hand. Find out what you're eligible for!
And lower-income families can receive additional grant money. When properly invested, these contributions will grow and multiply into a healthy balance by the time your children graduate from high school. They’ll be well prepared for their early adulthood, knowing that some (or all!) their education is paid for.
In short, an RESP can help supplement and reduce the financial aid your child will need to pursue their studies, allowing them to take on smaller loans and start their careers with less debt. They’ll still qualify for student loans and some scholarships to further defray tuition costs so they can complete the degree and reach their career goals!
