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RESP Sometimes Doesn’t Make Sense

in Canada Learning Bond, Registered Education Savings Plan

The RESP is a savings program for all income levels. This article was written and forgot to mention the Canada Learning Bond. The CLB is truly free money. If you have a low-income group and open an RESP, you will still receive money into it, even with no contributions. Most banks will not tell low-income folks about the CLB. Even experts don’t talk about this much, but it can help.

RESPs are a great savings tool for parents (or Grandparents) who want to help young folk with the constantly rising costs of post-secondary education. With the government add-ons, the whole system does make sense if you are planning on helping your children out, but I started wondering would there be a time when putting money into an RESP would make no sense?

There are some very obvious scenarios when savings don’t work. If you are carrying credit card debt and are having problems “making ends meet,” then putting money in an RESP might not make much sense. Pay off your debt, then get onto the savings bandwagon with the RESP. However, remember the CLB and see if that might fit.

Another exciting scenario I ran into was, what if you have not paid off your student loans (in Ontario OSAP) by the time your kids are born? Should you put money into an RESP while you are still paying off your student loans? As with all of these questions, the answer seems to be: it depends.

If you have enormous student loans and cannot keep up enough to make the payment plan set up for you, then maybe an RESP is not a great idea. You should also contact the Student Loans folks and point out that you have problems paying your loan off.

Typically Student Loans (from the Government) has a relatively low(er) interest rate. Given the automatic 20% kick-on for an RESP deposit (up to $2500), you need to do the math on whether you want to pay into the RESP or pay down your loan faster. As I do not believe in the concept of Good Debt, I would suggest paying off the Student Loan First and then try to catch up with the RESP (yes, I know the interest on Student Loans is favourable to your taxes, but it is still money spent on money already paid).

RESP
A Building Block to Savings?

If you have a Student Line of Credit with a bank (that you opened while at school) that needs to be paid, I would strongly suggest that you should pay that down before putting money into an RESP for your child. The Banks rates are usually variable in these situations, so a sudden uptick in interest rates could spell disaster in this debt load.

The idea of paying off student loans while putting money into an RESP seems contrary to me, but I am curious to hear what my readers might be thinking in this area?

More on Canada Learning Bond

{ 3 comments }

  • aB September 13, 2016, 12:33 PM

    Mathematically, that extra 20% is better than most debt repayment.
    But if one is trying to decide between the two, the math problem is not the problem that needs solving.

    Reply
  • Brian Poncelet,CFP September 13, 2016, 8:44 AM

    Hello Big Canjunman,

    There is an alternative to RESP’s for Grandparents where they have control of the money (pay no taxes) and could pass the account to parents tax-free.

    Give me a shout and I will send you some information.

    Cheers,

    Brian

    Reply

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