Pay Now or Pay Later?
Author: Sound Choices
October 13, 2020
How will you deal with rising education costs?
The content in the below article is meant for Canadian investors only.
How much would you pay?4
Pay now: $48,655 lump sum
- Invest a lump sum of $48,6555 today
- Growing at an average annual rate of return of 6% = $138,877 in 18 years
Pay monthly: $70,200 total
- Invest $325/month – $210 in an RESP and $115 in a TFSA
- Contributions to an RESP grow tax free until the funds are withdrawn
- RESP qualifies for a $500/year CESG
- TFSA withdrawals are tax-free
- Total invested:6
- $45,000 lifetime RESP contribution
- $7,200 lifetime CESG maximum per beneficiary
- $25,200 in additional savings
- Education savings = $139,637 in 18 years
Pay as you go: $138,884 total
- Pay at the beginning of each school year
- Year 1: $33,197
- Year 2: $34,193
- Year 3: $35,219
- Year 4: $36,275
Pay after: $186,705 total
- Post-secondary education financed through student loans that are interest-free while in school.
- After graduating, however, those loans must be repaid.
- Here’s one scenario:7
- Loan of the full amount: $138,884
- Interest rate: 6.2% (prime of 3.7% +2.5%)
- Monthly payments: $1,555.88
- Total interest paid: $47,821.60
- Total amount paid: $186,705.60
Remember: Starting early offers the benefit of power of compounding
- Investors A & B both invest $2,500 a year over 18 years in the same investment earning 6% annually (compounded monthly).
- Investor A opens a Registered Education Savings Plan (RESP) and takes advantage of the Canada Education Savings Grant (CESG) – receiving $500/year up to the lifetime limit of $7,200.
(The Government of Canada will match 20% of the RESP contribution each year to a maximum of $500 – reflecting $2,500 of the subscriber’s contributions.)
- Investor B opens a Tax-Free Savings Account (TFSA).
- Both account types are tax-exempt.
Both have benefitted from compounding returns. However, Investor A accumulated almost $14,000 more than Investor B, by taking advantage of the CESG.
Contact a financial advisor who can help you determine which option (or combination of options) best suits your situation.
For more information on RESPs, including a PDF version of this article, visit AGF.com/RESP.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
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