Registered Education Savings Plans by ipr10496


									                     facts about post-secondary education
                                                                                                                                         Local•Section 1281

                                                                                                                                Fall 2009
                                                                                                           Canadian Federation of Students

        Registered Education Savings Plans
               A National System of Grants for the Wealthy
Introduction                                                        The Canada Education Savings Grant
Federal funding cuts to post-secondary education during                For those who can afford to save, the federal government’s
the 1990s resulted in massive tuition fee increases in every           system of wealth-based grants does not stop with RESPs. In
jurisdiction except Québec. Even with the recent collapse              addition to the indirect grant described above, the federal
of the world’s economy (due in no small part to ballooning             government also offers a direct grant to any parent with
personal debt and stagnant wages), the federal government              an RESP account. The Government of Canada tops up the
has chosen to ignore its responsibility to restore funding to          first $2,000 in RESP contributions made on behalf of an
universities and colleges, and reduce up-front costs. Instead,         eligible beneficiary each year with a grant called the Canada
the government continues to advance an approach whereby                Education Savings Grant (CESG).
the individual is forced to pay an increasing portion of the           The grant can be as much as $500 each year per beneficiary
cost of education:                                                     up to a lifetime maximum grant of $7,200 per child. In other
 Period             Individualised Cost-Bearing Mechanism              words, those wealthy enough to put aside $2000 per year
 Pre-enrolment      Registered Education Savings Plans                 from the time their child is born until the end of the year in
                                                                       which the child enrols in post-secondary education will have
 Study              Access to debt (student loans)                     received a tax-free government grant of $7,200.
 Post-graduation Interest on student loan debt                         In response to widespread criticism about the regressive
                                                                       nature of the RESP and CESG programs, the federal
From this perspective, RESPs are a core program in a user-
                                                                       government attempted to make the programs more
pay funding model that reduces the role of the federal and
                                                                       appealing for low-income Canadians by introducing changes
provincial government in funding post-secondary education.
                                                                       to the CESG in the 2004 federal budget. The CESG payout
                                                                       was adjusted on a sliding scale to, at least in theory, be more
The Registered Education                                                                     generous to low-income recipients.
                                                                                             Beginning in 2005, children born into
Savings Plan                                       “These plans came under                   a low-income family can receive $500
The Registered Education Savings Plan                                                        towards an RESP account (the “Learning
                                                   heavy criticism in mid-
is an investment vehicle that allows a                                                       Bond”) plus $100 for every subsequent
contributor to save for a child’s post-
                                                   July from the Ontario
                                                   Securities Commission for                 year the child’s family qualifies as low-
secondary education. Unlike Registered                                                       income.
Retirement Savings Plans (RRSPs), the              their sometimes dodgy sales
                                                                                             Rather than acknowledge the real
RESP contributions are not tax deductible.         practices, early redemption
                                                                                             factors putting higher education out
However, the savings grow tax-free                 penalities, and loose portrayal
                                                                                             of reach for low-income families, the
until the beneficiary is ready to go full-         of investment returns”.                   Learning Bond’s proponents cling to
time to college, university, or any other          Jonathan Chevreau, Financial Post,        a naïve vision for solving social ills:
eligible post-secondary educational                August 28, 2004
                                                                                             “Through savings incentives and
institution. Under the current rules, one can
                                                                                             supports such as financial literacy, low-
contribute up to a lifetime limit of $50,000.
                                                                                             income earners are encouraged to save
Contributions can be made for 31 years and
                                                                       for their future goals. With the right incentives the poor can
the plan must be collapsed after 35 years.
                                                                       and do save!”1
The RESP is, in fact, a national system of indirect grants to
                                                                       Nevertheless, speaking in purely financial terms the amount
those who can afford to save, as the income generated by
                                                                       of money that low-income Canadians may accumulate
the RESP accumulates tax-free. The foregone tax revenue is
                                                                       under a Learning Bond will be wholly inadequate to cope
tantamount to a grant payable only to RESP investors. Since
                                                                       with the rapidly increasing costs of universities and college.
2000, the federal government has spent over $1 billion on the
                                                                       Dennis Howlett, former Executive Director of the National
RESP program.
                                                                       Anti-Poverty Organisation has noted that “When people
                       are struggling to feed their children and keep a            households in the lowest quintile (incomes under
                       roof over their heads, they have no extra money             $25,000) made up only 9.7% of families who were

                       available to ‘invest’ in university education, even         saving for post-secondary education. Households
                       if they were better informed about the costs and            with incomes exceeding $85,000 (the highest

                       benefits…starting salaries, even for those with a           quintile) accounted for 31% of savers.4 The average
                       university education, have been falling for some            savings by high-income families was nearly $7,000
                       time, at the same time as the costs of education            in 2001, whereas low-income households only
Amount spent by the    have been rising,                                                                         saved one third that
                       making it less and less                                                                   amount on average.
federal government
                       of a good investment”.2                                                                   Taken together, the
 since 1999 on the                                     “[Canada Eduation Savings Grants]’s give
                       Government-sponsored                                                                      RESPs and CESGs
  CESG program                                         scarce public funds to the wrong households...
                       education savings                                                                         represent a multi-
                       vehicles also promote           the CESG program should be discontinued”.                 billion dollar system
                       uneven spending across          UBC Economist Kevin Milligan
                                                                                                                 of indirect and direct

                       the country. In provinces                                                                 grants to primarily
                       where forward-looking                                                                     high-income families.
                       governments have kept tuition fees low, such as
   Average gap in      Québec, parents will have less need to save. The         Conclusion: Towards an Effective
   post-secondary      federal government has openly conceded this
  education savings    point: “The lower RESP take-up rate in Québec            and Fair Grants Program
                       is likely attributable to the province’s publicly           The federal government has failed at improving
  between low- and     funded college system (CEGEP) and relatively                access to post-secondary education through
high-income families   low university tuition fees for Québec residents”.3         equipping under-represented families with
                       Thus, Quebeckers and families in other lower                adequate education savings. That said, even if the
                       tuition fee provinces have a diminished benefit             program succeeds at improving savings levels,
                       from a multi-billion dollar federal grants program. it is still problematic as savings-based access to

 $770                  The biggest winners of the increased emphasis
                       on savings schemes are undoubtedly the RESP
                                                                                   education re-frames the question about affording
                                                                                   high tuition fees as a question about the individual

                       providers. The federal government has created               and their savings history, rather than about
                       a profitable scheme for the banks at the expense            Canada’s collective resources and the collective
                       of access to college and university. Further, the           responsibility to make education affordable to all.
  Amount expected      education savings industry has repeatedly been              Students with financial need would be better
  to be spent by the   the subject of criticism from both the Alberta and          served if the RESP and CESG programs were
 federal government    Ontario Securities Commissions for its sales tactics. converted into up-front needs-based grants. The
for the 2009-10 year                                                               federal government expects to spend $770 million
   on the RESP and     Four Billion Dollars and Counting                           on the CESG and RESP in 2009, more than double
                                                                                   the amount being distributed by the Canada
        CESG           Since the CESG is a “statutory” expenditure, there
                       is no predetermined budget for the program: if              Student Grants Program and what it would cost to
                       every single eligible Canadian could afford an              convert almost one-third of the money lent out by
                       RESP, the federal government would have to pay              the Canada Student Loan Program into up-front

                       out the corresponding CESG.                                 grants.
                       In the past ten years the Government of Canada           Endnotes:

                       spent $4.75 billion on Canada Education Savings          1. Peter Nares, Executive Director of Social and Enterprise
                       Grants. In terms of what the Government of                  Development Innovations.
                       Canada is prepared to spend annually on CESGs,           2. National Anti-Poverty Organisation news release
   Up-front grants     if every eligible parent invested the maximum               “Anti-poverty Organization Critical of New Education
    offered by the     $2,000 in CESG-eligible RESP contributions this             Report”, July 7, 2005.
 federal government    year, the CESG program would cost approximately          3. Planning and preparation: First results from the Survey
                       $3 billion each year.
through the CSGP in                                                                of Approaches to Educational Planning (SAEP) 2002.
                                                                                   Statistics Canada.
  the 2009-10 year
                       Benefiting Those Who Need it the Least                   4. Formative Evaluation of the Canada Education Savings
                                                                                   Grant Program: Final Report.
                       Research on RESPs shows that high income
                       Canadians benefit far more from this program than
                       do low income households. In 2001, children from

      The Facts About Post-Secondary Education • Canadian Federation of Students

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