What to do when you have insufficient or unused RESP funds

According to Statistics Canada, the average cost of undergraduate tuition nationally for the 2022/2023 school year was $6,834 per year. The costs can be greater or smaller depending on the program of study, and tuition represents only a portion of the total cost of post-secondary education. In fact, the data shows a four-year university program can cost $96,004 for a student living on campus and $48,074 for a student living at home.

In contrast, the average RESP balance for children aged 14 to 17 was $22,180 at the end of 2019. That’s enough to fund approximately one quarter to one half of the cost of a typical four-year university program. What should parents do to close the gap?

What if the RESP falls short of covering education costs?

Planning for RESP withdrawals can be more art than science. A child’s post-secondary aspirations or program, their scholarship entitlement, or the performance of an RESP account’s investments could lead to an excess balance in the account. More commonly, there is a shortfall, and that leaves parents and especially students in a position where other sources of education financing need to be considered.

In these situations, using funds from a tax-free savings account (TFSA), a high-interest savings account or a non-registered investment account may be appropriate. Applying for government grants and loans is another option.

Government grants and loans for education in Canada

Some parents are not able or willing to contribute to post-secondary education costs for their children. Part-time work during high school or post-secondary schooling is one way students can pay for their education. Federal or provincial grants and loans are another source of funding.

At the federal level, the Canada Student Grant program is for full-time students in financial need who apply for student aid provincially. In order to qualify for a grant, total family income must be below a pre-determined threshold that depends on the number of people in the family. The grant cut-off is $112,041 in gross household income for a family of three and is higher for larger families.

The maximum grant for the 2023/2024 school year is $4,200 per year or $525 per month of study.

The Canada Student Loan program is available to full- and part-time students to finance up to 60% of their tuition cost. As of April 1, 2023, no interest is charged on federal student loans.

Provincial student loans as well as private loans can also be used. Employment and Social Development Canada is a good source of information on programs available across the country.

What to do with unused RESP funds  

An RESP account holder who ends up with unused RESP savings because a child does not pursue post-secondary education or does not need all the money in the account has a few options.

If the account is a family RESP, the funds can be used by the beneficiary’s siblings. For this reason, family RESPs can come in handy for families with multiple children.

An unused individual RESP can be transferred to a sibling’s RESP without tax implications. However, the contribution history of the transferring RESP is assumed to apply for the receiving RESP’s beneficiary. This could result in needing to repay some government grants, if the annual or lifetime maximum contribution for the beneficiary of the receiving RESP was exceeded.

An RESP can also be rolled over to a registered disability savings plan (RDSP) for a disabled beneficiary who qualifies and is eligible for the Disability Tax Credit.

As a final back-up plan, the RESP subscriber—typically a parent of the beneficiary—can transfer some of the RESP balance to their registered retirement savings plan (RRSP). The original RESP contributions can be withdrawn as tax-free principal. The income and growth can be transferred to an RRSP on a tax-deferred basis to the extent the subscriber has RRSP room available. This transfer is subject to a $50,000 limit.

When transferring to an RRSP, any unused government grants must be repaid. The beneficiary or beneficiaries must be at least 21 years of age and not currently pursuing post-secondary education, and the account must also be at least 10 years old.

If a transfer to another RESP or to an RDSP or RRSP is not possible, the income and growth withdrawn from the RESP are taxable to the subscriber. In addition to paying tax at their regular tax rate, the subscriber must pay an additional 20% penalty tax to withdraw the funds. This would be an uncommon scenario.

Schools often provide information on their websites about the estimated all-in cost of education for a particular program. Long before a student applies for higher education, it’s a good idea for families to do their due diligence and start planning how they’ll pay for it.

Read more from student finances:

• The best ways to help kids financially
• The top 5 questions about RESPs

• How much money does the government contribute to an RESP?
• RESP vs RRSP and TFSA: What’s the best option for education savings?

• 4 things to get right when tapping RESP savings

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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