AGF Logo
  • Home
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Personal Finance
  • Français
  • AGF.com
  • InstarAGF.com
Skip to content
AGF logo
Insights and Market Perspectives
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Personal Finance
  • Contributors
  • Français
  • Search
Search
Close
Pay Now or Pay Later?

  • Personal Finance

For Print Only Logo
Insights and Market Perspectives

Pay Now or Pay Later?

Author: Sound Choices

October 13, 2020

Education Savings:
How will you deal with rising education costs?


The content in the below article is meant for Canadian investors only.


chart showing the cost of education in 2036.
A 2018 report estimated that one year of post-secondary education in Canada costs approximately $19,5001 – including tuition, accommodation, transportation, food and other expenses.
Assuming a 3% rate of inflation, that equates to $33,1972 in 2036 (18 years later) and $138,8843 for four years of education.

How much would you pay?4

This example is hypothetical and intended for illustrative purposes only. It is not meant to provide investment advice.

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    • Contributions to an RESP grow tax free until the funds are withdrawn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.

Source: AGF Investment Operations. This example is hypothetical and intended for illustrative purposes only. It is not meant to provide investment advice.

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.


1 Weighted average of all major expenses for a typical undergrad student living off-campus at a Canadian university. Source: “The cost of a Canadian university education in six charts,” Macleans, April 1, 2018.
2 $19,500 with 3% inflation for 18 years = $33,197.
3 $19,500 with 3% inflation for 18 years = $33,197. $19,500 with 3% inflation for 19 years = $34,193. $19,500 with 3% inflation for 20 years = $35,219. $19,500 with 3% inflation for 21 years = $36,275.
4 Note – These calculations assume that: (a) Lump-sum investments are held for 18 years; (b) Monthly investments are made at the beginning of each month for 18 full years; (c) All investments earn an annual compounding rate of return of 6%; and (d) All distributions are reinvested. They do not include any fees or taxes payable. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investments.
5 A lump-sum investment of $48,655 invested now in a managed portfolio growing at an average annual compounding rate of return of 6% = grows to $138,877 in 18 years.
6 $210/month plus $500/year CESG Grant (to a maximum of $7,200) starting now earning a hypothetical annual rate of return of 6% (compounded monthly), plus an additional $115/month in a TFSA grows to $139,637 in 18 years. Note that, in this hypothetical example, the RESP lifetime contribution limit of $45,000 is reached after 17 years, 9 months so for the last 3 months, the $325 monthly contribution is invested in the TFSA.
7 Loan of $138,884 at 6.2% (prime of 3.7% +2.5%), 120 monthly payments of $1,555.88. Total interest paid $47,821.60. Total amount paid $186,705.60. Assumes first payment is six months after graduation.
The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

AGF Management Limited (“AGF”), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGF’s investment management subsidiaries include AGF Investments Inc. (“AGFI”), AGF Investments America Inc. (“AGFA”), Highstreet Asset Management Inc. (“Highstreet”), AGF Investments LLC (formerly FFCM LLC) (“AGFUS”), AGF International Advisors Company Limited (“AGFIA”), Doherty & Associates Ltd. (“Doherty”) and Cypress Capital Management Ltd. (“CCM”). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.

TM The “AGF” logo and ® “Sound Choices” are registered trademarks of AGF Management Limited and used under licence.

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.

© 2021 AGF Management Limited. All rights reserved.

Written by

Sound Choices

Sound Choices

More from Sound Choices

  • Personal Finance

Retirement Trends – Do You Need to Adjust Your Plan?

February 24, 2021

  • Personal Finance

RRSP vs TFSA: Which one should you choose?

February 16, 2021

  • Personal Finance

Understanding Different Types of Investment Accounts

January 31, 2021

  • Personal Finance

Ready to Start Investing? These Top Tips Can Help

January 21, 2021

Get perspectives straight to your inbox.

Subscribe now

More articles like this.

Retirement Trends – Do You Need to Adjust Your Plan?

  • Personal Finance

Retirement Trends – Do You Need to Adjust Your Plan?

Sound Choices | February 24, 2021

Getting a better understanding of these major retirement trends and changes will help you better plan for your retirement.

Read More
RRSP vs TFSA: Which one should you choose?

  • Personal Finance

RRSP vs TFSA: Which one should you choose?

Sound Choices | February 16, 2021

What are the key differences? And what should you do?

Read More
Understanding Different Types of Investment Accounts

  • Personal Finance

Understanding Different Types of Investment Accounts

Sound Choices | January 31, 2021

You have many account options to choose from when saving for your future, with each offering plenty of advantages … as well as some restrictions.

Read More
AGF Logo
Categories
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Personal Finance
  • Subscribe
Follow AGF

AGF Web Site Pages © 2021 AGF Management Limited. All rights reserved.

Links
  • Terms & Conditions
  • Privacy
  • Privacy For EU Residents
  • AGF.com
  • InstarAGF.com