College and University looks a little bit different now but one thing remains the same – you have to pay for it…The cost of post-secondary tuition is increasing at an alarming rate, and the cost of post-graduate degrees (i.e. an MBA) in Canada can exceed $100K, while medical school can be in the $200-300K range. As a result, student debt is becoming an ever-present reality for many business owners and their children, some of whom are faced with a level of debt that is life-altering.
Here are some of the most common questions we get as financial planners: How should I pay for my child’s post-secondary education? Is it worth dipping into our retirement savings to pay tuition? Is student debt the new normal? As a business owner should I be paying for university tuition differently? Let’s clear a few things up.
Like many parenting decisions, it’s complicated when a business owner tries to determine how much assistance to offer their children for post-secondary expenses. Speaking for myself, I don’t want my children to be buried under debt into their 30s, 40s, and even 50s, but I also want them to feel the pride of making their own way in the world and becoming self-reliant.
Looking back on my early financial experiences, I see that paying my own way for high school and four years of university paved the way for my future successes. I know that tuition, when I was a student (which, contrary to my children’s belief, was not before the invention of the printing press!), was lower relative to today, and I didn’t have to fund a graduate degree. But I also know that funding my education gave me fundamental confidence in my ability to achieve my goals, which has been an important factor in my ability to build a successful business.
Funding my education required me to work part-time during the school year and full-time during the summer months. I also lived at home until the age of 24. (Saving money was also partly a side effect of how quickly I learned that it’s a lot harder to spend your own money than other people’s!)
The first step
Before you enter into a conversation with your children about how much of their education you will fund, I think there is an important decision to consider making together: selecting a cost-effective post-secondary destination. Universities in Ontario and Toronto always place high in international rankings, yet are relatively inexpensive compared to their peers in other countries because of the substantial government funding for education in this province. As a result, schools right here at home deliver incredibly high value-to-cost ratio versus out-of-province or international schools.
I mention this because I often meet parents who are willing to send their children to very expensive schools in the United States. Some have their eye on elite Ivy League schools like Harvard. Others prefer colleges that are less well known, such as Pepperdine in Malibu, California or many of the small liberal arts colleges in the Northeast like Bates.
Assess the full financial impact
To assess the financial implications of these decisions, consider a comparison between tuition for a science student who goes on to medical school at the University of Toronto (UofT), the top university in Canada, or to Harvard. Tuition for a year of undergraduate study at UofT costs less than $7,000, while the equivalent at Harvard is approximately $70K USD per year. That means that if you support your child through four years of undergraduate education, you will be paying roughly $28K at UofT and $280K at Harvard.
Certainly, there are arguments to be made in favour of attending a prestigious institution for graduate or professional education, but I can’t help but wonder how much of a difference it makes for undergraduate education. If money is no object, I can see pursuing whatever option appeals. But for many business owners, huge payments for education are not realistic and will burden the child and the parents for many years to come. These costs also limit a child’s ability to contribute a significant portion of the funds for their education.
I’m not saying that some universities that charge 10 times the cost of Toronto schools are not worth the tuition. I’m saying that these schools may burden one’s financial future for many years and create a long-term struggle with student debt.
Here are 6 creative solutions for how the costs of their learning could be covered:
1) Scholarships
I motivated my children to work very hard in high school and apply for scholarships that offered them an opportunity to obtain full or partial funding for their tuition. Both of my older children had approximately 50% of their tuition covered and my daughter, who is still in high school, is currently on track to make it three for three. (Does that make me a perfect dad?!)
2) Working During School
As students, both my wife and I worked during the school year and generated funds for discretionary expenses such date nights and clothing. Unfortunately, I have seen too many kids live in mom and dad’s basement, play video games during the day and party at night, which is easy to do when you are spending other people’s money!
3) Summer Work
A big portion of tuition can be paid by working during the summer months, which usually starts in mid-April and runs until the end of August.
4) Registered Education Savings Plan (RESP)
For many years, I have invested money into a Registered Education Savings Plan (RESP) for my children’s post-secondary education. The rules governing these plans have changed many times over the past decade, but at this point, annual contributions of $2,500 per year are permitted and lead to a 20% government grant – or $500. (It is almost like receiving free money).
The current maximum that can be invested in a RESP is $50,000, and the maximum lifetime grant is $7,200 per child. In addition to the annual grant, the portion withdrawn in excess of the amount invested is taxed in the hands of the child, who is typically in a low-income tax bracket because they are a student. So the plan provides up to $7,200 of grants and tax-deferred growth, for up to 36 years (under certain conditions).
5) Parents’ personal savings
I have paid a portion of my sons’ tuitions from my personal savings and cash flows, and I expect to do the same for my daughter. The percentage I paid was less than 50% of undergraduate tuition and about 25% for graduate school.
6) My children’s student loans
Both my older children didn’t accumulate debt for their undergrad degrees but did accumulate a small and manageable loan for grad school.
If you’re unsure how you will pay for your children’s education, contact us and we can run the math and help create a plan with you.
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