Hi there. In this finance post, I want to go over the basics of a Registered Education Savings Plan (RESP). In Canada, we have these RESP financial products for those who would like to save funds for their child's university/college costs. I am not sure if these RESP financial products exist in the United States or in Europe. (I think European tuition costs are much lower than in Canada and in the USA. Correct me if I am wrong.)
Contents of this post is based on findings from the internet and based on my brief time working for a Registered Education Savings Plan company just west of Toronto. (Yah I didn't like that department in that company.)
Disclaimer: This is an informational post. I try my best in this post. Do more research past this post. Invest your funds at your own risk.
References:
https://retirehappy.ca/resp-withdrawal-rules/
Math text rendered with the use of QuickLaTeX.com.
Annual university tuition fees in Canada are pretty expensive. In the United States, it is even more expensive. This website has a list of different universities in Canada with their tuition fees for Canadian students and International students at the undergraduate level and at the graduate level. I have included a screenshot below for 2019-2020. (I would assume fees for the 2020-2021 year would be not much different to adjust for inflation)
According to QS Top Universities, you can expect to pay an annual tuition fee of $6 463 CAD at the undergraduate level and on average $7 056 CAD per year at the graduate level. These costs are most likely domestic fees. International students studying in Canada pay at least $10 000 CAD per year. In addition, I believe that university tuition in the Quebec universities such as McGill and the University of Montreal have cheaper tuition fees than the average but they are mostly taught in French. (You would have to look into this further if you are interested.)
Due to these high tuition prices, the finance people have come in and have introduced these financial products called Registered Education Savings Plans (RESPs). Yes, we have a bit of financialization in Canada but it is what it is. These RESP products exist in the financial services industry that can be found in big banks and specialist RESP financial services companies. The purpose of these RESPs is to have customer investors deposit funds into a pool over time to build funds to help cover the costs of university/college costs in Canada.
These RESPs do have variations in their payment plans and withdrawing funds schedule. You can do one large lump-sum payment for a child and let the compound interest do its magic in growing that lump-payment into something massive after a maximum of 18 years. (Birth to 18 years old being done high school.) For those unable to do lump-sum payments, you can do (smaller) regular deposits on a monthly, bi-weekly or monthly basis until the child beneficiary starts university/college. Different companies have different RESP products with their own policies. Do more research and find something right for you.
An RESP calculator such as this one is nice for estimating future education costs for a child. You may have travel costs, room and board costs on top of tuition costs.
RESP funds grow in monetary (fiat) value due to compound interest. Let's review the concept of compound interest.
The customer in this case buys a RESP product and starts depositing money into the fund. When the money is deposited the money is transferred from the customer into the financial services company. (The money does not belong to the customer now.) As the deposited funds are stored by the financial services entities, the customer/depositer receives interest over time. This interest is added to the funds. The funds that in stored in one time period is reinvested as it is kept in deposit.
We can write a mathematical formula to show how one single payment can grow into something larger over time with compound interest.
where FV is the future value of the present value deposit, PV is the single deposit at the current time, i is the compounded interest rate, n is the number of compounding periods and t is the number of years for the amount being deposited.
The interest rate i varies depending on how the interest is compounded. If there is an interest rate of 12% that is compounded monthly the interest rate i is actually 1% from 12% divided by 12 months. (This 1% is is 1% in each monthly period with n = 12 months in one year.)
For multiple regular deposits, we have something called an annuity. The math formula is more complicated. It may be in a future post.
Once the child beneficiary of the RESP enters post-secondary education in a university or college, funds can be withdrawn from the RESP account. The funds have grown thanks to compound interest and time. In order to be able to make withdrawals from the RESP, you do need proof that the child has been accepted and verified to a university/college. The information in the proof would include the student name, the name of the university/college, program name and the year of enrollment.
The withdrawn funds can be used for tuition fees, textbooks costs, school materials and equipment, room and board. A good handful of people invest into RESPs so they can be eligible for government grants.
