Freshmen finance

Thousands of families will soon hit the road with overloaded cars to make the annual pilgrimage to a Canadian college or university. But while heading off to school can be an exciting time, it won’t be much fun if you and your kids are pinching pennies. Everyone knows post-secondary education is expensive. It’s why families start saving for it before their kids are even out of diapers. Having an RESP at the ready is key. But even if you have that in place, schools are full of hidden costs and pitfalls to test even the most cost-conscious student. Here are a few important money-related tips to make the next three or four years run smoothly without breaking the bank. RESP Withdrawal You’ve been saving money for years and now it’s finally time to withdraw. It’s easy to get the money out, says Stephanie Holmes-Winton, an independent financial advisor based in a Dartmouth, N.S., you simply have to fill out a form proving that the child is enrolled in an accepted post-secondary facility. But what a lot of people may not realize is that the money doesn’t need to be used for tuition; books, rent and food are some of the more common non-tuition uses for RESP money. If your child’s worked over the summer or if the family has some additional savings, then the money from the RESP can be used for literally anything, says Holmes-Winton. Still there are few things you need to know with it comes time to withdraw the funds. For instance, within the first 13 weeks you can use as much of your own RESP contributions as you wish, but there are restrictions on how much you can take out from the Educational Assistance Payments (EAP), which is the government grants and accumulated income portion of the RESP. In that period you can only withdraw $5,000 from the EAP portion, after those 13-weeks are up you can liquidate the entire account. But be careful, says Mathieu Paradis, an Ottawa-based financial adviser with Raymond James. When you withdraw the funds you need to indicate what part of the money you’re removing: principal or EAP. There’s no tax on the principal, but the EAP portion is taxed in the hands of the student. Paradis suggests withdrawing the EAP savings first. In the first year of university it’s less likely the student will have made much money that year so they’ll likely be in the lowest tax bracket. Summers are longer for students in college and university then they are for high school students. That means they have more time to work, which could put them into a higher tax bracket. Once all the money from the RESP is used up the account automatically closes. In the rare cases if there is money left over, then those funds can be rolled into an RRSP. Student credit cards As soon as your child enters university, they can expect to be bombarded by credit card companies offering all sorts of perks. While it pays to be cautious, student credit cards can be a good thing to own because it helps people understand how to use one without incurring major debt, says Holmes-Winton. Typically the amount of available credit is low—around $500 or $1,000—although the interest rates on some of these cards can still be quite high. Having a credit card also builds up a credit history, which is the main reason a student should have one. “Having a student credit card is important because when your child goes to get a mortgage or apply for a car loan after they’re out of school they need some credit history,” says Holmes-Winton. Problems arise when students don’t understand how to use the card. It’s not something that should fund trips to the pub, says Holmes-Winton. She suggests getting the card before university starts—before the credit card companies have a chance to pressure your child into signing up—and talking to them about what it means to have a credit card. Get online access so you can see how the student is spending. “I love it when both people have access to the statement,” she says. “It’s like training wheels for the credit card. The kid can still fall down, but you see the fall and help them up.” Start saving early The first eight months of university can be the most costly to parents. If the child is renting an apartment they’ll have to pay first and last month’s rent, there’s the excitement of making new friends and going out and all the books and supplies have to be bought in the first few weeks. It’s always a good idea to create a budget for a soon-to-be student, but it’s particularly important for those just starting out, says Paradis. “There will be a lot of scrimping and saving in the first year,” he says. Talk to kids after they graduate from high school and spell out what everything will cost and what they should expect to spend in the first few weeks and months. Holmes-Winton says that August should be a low-spending month—and, if possible, a high earning one—for students so they have money in September. She remembers having to babysit and add shifts to her day job in the summer after high school to pay for first and last month’s rent on her first apartment. There’s one tip that trumps everything else, though, says Holmes-Winton: talk to your kids about money. This is really the first time that children are out on their own and looking after their own finances. “It takes planning and thinking,” she says. “This is a baby step to learning to plan around larger expenses, like a mortgage. Parents need to sit down and instead of telling the child what to do, ask them what their plan is.”

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