In Rob Carrick’s most recent offering he talks about how he feels parents should be prepared to help their children out in their quest to graduate from post-secondary education without a crushing load of debt. I have also heard many other personal finance gurus claim that tough love is the best method for teaching financial awareness at a young age, and that saving for your retirement is a much more important goal than helping out your children. It seems to be one of those weird topics where smart, rational people disagree intensely.
The Middle Ground
Like most instances where there are intense advocates on both sides of the spectrum, the best answer is usually somewhere in the middle. I think there are many parents out there that are guilty of sacrificing much of their retirement planning to help their kids. It’s tough to be too critical of selfless individuals who only want to help their children, but some degree of balance is best. I think that most financial planners would agree that funding a company match pension should be priority #2, second only to paying off high-interest consumer debt (and possibly ahead of that, depending on your preference).
After checking in on your automatic company match the question becomes TFSA/RRSP vs RESP in terms of priorities. If you are one of those lucky Canadian government employees like SPF and myself, your DBP gives you a super solid structure to build the rest of your retirement plan on, and you are in a great place to put some focus into the RESP program. I can sympathize with parents needing to make sure they won’t be dependent on the government pension programs when they reach an age they want to retire at, but ultimately, I think given today’s knowledge-based economy and escalating post-secondary costs, the greatest gift you could give your child.
This… Is… Sparta…
I am not a big supporter of the whole mindset that you can teach your child how to manage their finances by making them completely fend for themselves at age 18. I know there are a lot of people out there that say, “My parents made me survive Spartan-style in the wild for years, and it just made me tougher – I didn’t need no RESP things,” but the bottom line is that school costs are quickly escalating and young adults are entering a tougher job climate than we have seen in a long time.
If possible, the looser the noose of student debt is around their neck, the better. Remember, the money you save or invest at the beginning of your life has huge compounding effects right? If you’re paying your way out of student debt until your 35, this will cripple your long-term savings ability, or your chances of making headway on a mortgage.
There is obviously a wide middle ground between paying for your child’s entire education, and not giving them a penny right? Arrangements where parents make RESP help (remember, you control the purse strings on this deal, and your original contribution can be rolled into RRSP at any time) contingent on grades, or finding summer work, or staying out of credit card debt can be a very effective teaching tool in my experience. Financial aid is also available through most universities and this aid sometimes includes grants and scholarships. Your child will have to begin by filling out the Free Application for Federal Student Aid. The federal government will then determine that student’s need for aid. In some cases, the government will award grants that do not have to be repaid based on the student’s need. If no grants or scholarships are awarded, student loans can also be attained through this application. While going into debt is never ideals, it is often the only answer when seeking education.
The Government Wants Us To Be “Poor”
One legitimate original point I read a little while ago is that RESPs actually cripple a student’s ability to collect student loans and subsequently apply for many need-based bursaries. While this is true to some extent, it’s not like loans are based on your RESP income. They are based on your assets and your parents’ income. So while them giving you RESP money might limit the loan amount you receive, it is their income level that will likely determine if you qualify for a loan or not. In order to apply for need-based bursaries and scholarships, most of the time all you need is a student loan of some kind, even it is only a thousand bucks. Furthermore, there are still plenty of merit scholarships out there that your child will be eligible for no matter what their income level, so intentionally trying to make sure they have no money in the hopes they can apply for more scholarships is not the most ideal strategy in my mind.
Tough – but fair – Love?
I would never blatantly state that parents owe it to their children to pay for their post-secondary education. There are numerous examples of parents who teach their children by guiding them instead of giving them money. That being said, I’m such a huge fan of the RESP program and giving your kid a fighting chance at coming out of school debt-free that I would highly recommend parents trying to chip in a little every year in preparation for the big day. RESPs are really flexible tools and apply to almost any sort of post-secondary education – not just universities. I have even written about contributing a little money into these accounts as birthday or Christmas gifts, and I’ve even seen several families where grandparents help make these contributions. If you do this at a young age, it will be a HUGE help when that 18-year old hits the adult world. I’m cool with teaching responsibility, and I’m fairly certain I’m more tough love than most, but helping students today navigate choppy waters will likely pay huge dividends in the future to my way of thinking.
Do you plan on helping your children out on their post-secondary journey at all? Why and how?
(Photo credit: Sean MacEntee)