I love the Registered Education SavingsPlan. When my kids were born we set upRESPs for them as soon as we could. Butnot all RESPs are created equal.
Most parents have probably seen thescary statistics about just how much moneyit is going to cost to educate their kids.Without advance planning some studentsare going to finish school with studentloans the size of a mortgage, and that's adefinite handicap as they begin their career.
If at all possible, parents and grandparentsshould probably give some thought tohelping pay for the kids' education. Byplanning ahead those future educationexpenses can be made much more manageable.
The big advantage of an RESP is that thegovernment will help chip in. The governmentwill match 20 percent of your contributionsup to certain limits, with additionalgovernment monies available for lowincome households. The RESP plan hassome rules that must be adhered to, butthink of the instant 20 percent return onyour money and you can see why theseplans are so popular.
There are some very different types ofRESPs though. And frankly, in my opinion,some of them are flirting with disaster. It'sthe RESP subset of scholarship trusts that Ithink should be exposed to harsh scrutiny.
I've wrote about this before. My friendBruce, who happens to have a couple ofthese scholarship trust RESPs for his kids,says I need to write about it again.
The last time I wrote about scholarshiptrust RESPs I used the example of a planthat I had recently reviewed for a client.This is a young family who is putting away$50 a month for their one-year-old daughter,who we will call Leslie.
How this product operates is that in thefirst year of Leslie's schooling the parentswill receive a refund of their own money. Inyears two, three, and four Leslie will receivethe growth on the money that was putaway for her. As an added bonus, she willshare in the pool of money that other studentsdid not qualify to collect. So far, thissounds pretty good.
And if Leslie does qualify for her "scholarship"this will be a pretty sweet deal. Shewill get the benefit of the money that wasput away for her, and a share of the moneythat was put away for all of the other kiddiesnot fortunate enough to qualify. Theproblem is the odds are not good that shewill collect on this bonanza. That's noreflection on Leslie. She's one year old, forgosh sakes, we have no idea what thefuture holds for her.
You see, the key to this "scholarship" isthat she completes four years of post-secondaryeducation in the manner dictated bythe scholarship trust company. While parentsare pre-disposed to want and hopethat their child completes a four-year program,there is a big discrepancy betweendreams and reality
I came across some interesting informationpublished by the Business Council ofBritish Columbia on how many peoplewould actually meet criteria of the four-yearprogram.
The study says that 75 percent of B.C.high school students graduate within 6years. Of these high school graduates,approximately 70 percent, or about 52 kidsout of a hundred, go on to post-secondaryeducation. But of these that go on to post-secondaryonly one-third, or about 17 kidsout of a hundred, are in a four-year program.
If your kid is one of the 17 in a hundredthat fulfills the criteria they will do very wellwith a scholarship trust RESP, since they willget to claim not just the money that hasbeen put aside for them, but also share inthe money that was forfeited by the peoplethat were not so fortunate. But how canyou tell whether your one-year-old will beone of the 17 that prosper or one of the 83that subsidize the winners?
To be fair, not all "scholarship" RESPshave the requirement that the kid enrolls ina four-year program. However, the alternateplan doesn't have the same payoff potentialeither.
Meanwhile, Leslie's parents are gettingabsolutely soaked when it comes to thefees they are paying. The enrollment feesfor them to put away fifty bucks a monthfor their daughter's education comes toeleven hundred dollars. They are one yearinto this scheme, and so far $598 of the$600 that they have contributed has goneto fees. If they were to continue with theplan they would see still another $500 goto fees.
By the way, they won't be continuingwith the plan. No sense throwing goodmoney after bad.
If Leslie did happen to meet the "scholarship"criteria then the fees would bereturned, but we already know that 83 outof a hundred kids are out of luck. And forthe people who do get their fees back,there is no interest paid on the money. Sothe best case scenario with regards to thefees charged is that Leslie's parents give thescholarship trust company eleven hundredbucks for 17 years just to get the elevenhundred bucks returned to them 17 yearslater. Worst-case scenario Leslie's parentsjust give the scholarship trust companyeleven hundred bucks.
When this information was previouslypublished it came to the attention of theChairman of the RESP Dealers Associationof Canada, whose members consist solelyof companies that sell scholarship trustRESPs. As expected, this gentleman wasready to defend the structure of the scholarshiptrust RESP.
He suggested that my estimation of howmany people actually collect on the "scholarship"was inaccurate. When I told himthat we could quickly resolve this differenceof opinion, all he would have to do was toprovide me with the actual statistics fordrop-out rates for these plans, I neverheard from him again.
RESPs? Absolutely! Kids today are facinghigh post secondary costs, and they willneed some sort of training to find meaningfulcareers.
Scholarship trusts, forget it. They arefatally flawed in my opinion, and characterizedby high fees, and strict qualifying criteria.To make matters worse, the problemswith the scholarship trusts RESPs don't endhere, although the column must.
If you have one of these products nowdo yourself and your kids a big, big favourand talk to someone who knows. My friendBruce did, and while he is not happy to findout that his products aren't what hethought they were, he is happy to have thisexplained to him. Now he can make aninformed decision about what to do withthese plans before he puts another tenyears worth of contributions into somethingthat might not give him much back.
The opinions expressed are those of BradBrain, CFP, R.F.P. CLU, CH.F.C., FCSI. BradBrain is a Certified Financial Planner withManulife Securities Incorporated, MemberCIPF and with Manulife Securities InsuranceAgency in Fort St John, BC. Brad Brain canbe reached at brad.brain@manulifesecurities.ca or www.bradbrainfinancial.com.
