Reference no: EM132623529
As tuition fees have risen, more students have relied on student loans to help finance their post-secondary education. According to the 2013 National Graduate Survey, students who receive funding through the Canada Student Loan Program are graduating with an average debt load of 28,495.Fortunately, similar studies have shown that post-secondary graduates have fared better in the labor market than those with less education.
With the cost of an undergraduate degree estimated at $60,000, it's essential that parents start to save for their children's education when their kids are young.
Registered Education Savings Plans (RESPs) allow for tax-sheltered growth and, through the Canada Education Savings Grant, the federal government contributes up to $7,200 over the life of the plan, depending on your family income. RESPs can be used for tuition at universities, colleges, and trade & technical schools. The original capital can be withdrawn tax-free at any time, but the investment income and the grant are taxable at the beneficiary's (student's) rate of income tax, when withdrawn. Contributing $100 a month to an RESP can grow to more than $30,000 by the end of 15 years (assuming a 7% annual rate of return).
But if parents haven't saved enough, there are other options to help. The federal government offers Canada Student Loans to full-and part-time post-secondary students in most provinces who demonstrate financial need. Students have a six-month grace period after they finish school before they must start to pay back the loan, although interest does start accumulating during this time. Alternatively, a student line of credit offers funds at a lower interest rate than a credit card, generally prime plus 1% to 3%. Payments must be made while the student is still in school, but can be spread over many years, and students generally require a cosigner (a parent or guardian).
The bottom line is that the RESP is likely the best means of accumulating money for post secondary education, if the contribution is at least $2000 a year per child.
1. The advantage of RESP is that the government will contribute $1 for every $5 parents put in, up to a maximum government grant of $500 per year per child. Assume the Wong family contributes $2000 per year over a 16-year period to an RESP earning 4.85% interest compounded semi-annually.
a) Calculate the value the plan would have at the start of the 17th year.
b) Calculate the value of annual contributions of $2000 into a non-RESP plan over a 16-year period at 4.85% compounded semi-annually.
c) Determine the difference in plan values of the RESP plan and those of the non-RESP plan.
2. Assume that $1000 was contributed at the beginning of the year into an RESP plan for 10 years.
a) If the rate of interest was 4% per annum compounded annually for the first 5 years, and 5.2% compounded quarterly for the last 5 years, calculate the amount of the plan.
b) If the beneficiary's tax rate is 25% and the student uses this amount for a four-year degree, calculate the monthly value that can be used by the student.