Financing Post Secondary Education Without Going Into Debt

September 1997

Imagine being a young university graduate and owing a hefty $20,000 in student loans. You haven't even landed your first full-time job and you are already on the hook for annual payments of $2,000 or more - depending on interest rates. And, unless you can manage to increase payments, you won't be out of debt for another 15 years.

With only 25 percent of parents currently paying the bill for their children's post-secondary education, it makes sense that so many students today are counting on borrowed money and getting deep into debt.

As a result of government cutbacks, there are fewer loans available. Some students like Janine Badry, a full time student at McGill are having to turn to the banks for private assistance. As a result, Janine has had to make interest payments on her bank loan from day one (interest on government-backed loans starts accumulating only after the student graduates). What's more, she has just five years after she graduates to pay the loan off. "It is very stressful having that kind of obligation over your head."

Maria Pilar Segura, Clark Street resident and mother of two, is one among a growing number of parents concerned about financing their children's post secondary education. "It's really scary when you hear these stories about students graduating with astronomical debt," she said and added, "I don't want that for my kids." Maria has already opened a savings account in-trust for her oldest daughter, Samantha, who will be ready to enter university 15 years from now. "In-trust" means the money is Samantha's, Maria will only act as trustee until her daughter turns 18. Given the current cost of one year of university, including tuition, books, food and rent and assuming a three percent inflation rate, Samantha will need just over $60,000 for a four-year undergraduate degree- if she lives away from home.

Maria has been depositing her child tax credit into the in-trust account since Samantha was born. To date she has accumulated $3,500. Although she considered purchasing a bond, after consulting with a financial adviser, she changed her mind. Instead she will put the money into a conservative equity mutual fund and increase monthly contributions to $100 per month. "It was the best way to ensure I would save enough, she concludes.

Maria had also heard about RESPs (Registered Education Savings Plans), a government approved plan that allows earnings to grow on a tax-deferred basis. She decided against that route since she didn't want to risk forgoing all her interest if Samantha didn't go to university or college. Although the rules governing RESPs have recently become more flexible, the in-trust account remains the best option for Maria's savings. It allows all the flexibility she wants and because earnings will largely be in the form of capital gains, there is no attribution for tax purposes.

The bottom line: Just about everyone can afford to pay for their children's post secondary education. It's a matter of starting early and planning wisely. Before making any decisions, consult a professional adviser so that you fully understand all your options. Just don't wait until there is no other choice but to go into debt.