If you\'ve been reading the headlines recently, the costs of education are not exactly shrinking. Infact, the latest headlines show law schools increasing their tuitions multiple times to keep pace with the quality offerings of US schools. U of T Law school will soon have tuition fees of over $20000 per year! That\'s alot of cash to payout.

But, just how will you pay for your kids\' education?

You have three choices: you can pay before, during or after they are in school. By taking out loans, you will have to repay the loan after - an expensive proposition. If you pay during, you will have to cope over a few years - not easy when you have normal living expenses to pay. This leaves one sensible option: Begin saving now.

The best option is a Registered Education Savings Plan (RESP). An RESP is a government approved plan that permits earnings to compound on a tax deferred basis. You do not gain tax deductions for your contributions like an RRSP. However, the earnings (capital gains, interest and dividends) grow tax-free. When the earnings are withdrawn, the student pays the taxes, usually at a much lower rate. The non-taxable contributions can be returned to you at any time.

An RESP also offers the potential to build a larger pool of savings over the long term through a variety of investment vehicles. In the event that the beneficiary does not go to college, university, or other qualifying institutions, you can generally transfer the fund to another eligible full-time student or your RRSP (if you have available contribution allowance).

Government Grants

You can contribute up to $4,000 each year to an RESP with a lifetime limit of $42,000 for each beneficiary. As of January 1, 1998, the government will give you a grant of 20% ($400) on the first $2,000!!!

If you make only a $95 contribution to an RESP each month and receive an annual compounding rate of return of 10% for 18 years, you will earn about enough money to cover one child\'s education (including the government\'s 20% grant). In addition, it will have cost you only $20,520 (with a total government grant of $4,100). So start now and invest regularly - it is a much cheaper way to pay for your kids\' education.

Three Reasons Why RESPs Make Sense

1. - Through Canada Education Savings Grants, the government pumps up your contribution by 20% per year, to a yearly maximum of an extra $400.
2. - Your investment grows tax-free until it\'s withdrawn.
3. - Income from the plan eventually is taxable in your child\'s hands, at a time when his or her tax rate is likely to be low.

How Would an RESP Work For You?

The Canada Eduation Savings Grant provides RESP holders with a grant of 20% on the first $2,000 contributed to an RESP each year for beneficiaries under the age of 18. Grant recipients will be eligible to accumulate a lifetime grant of $7,200, or a maximum of $400 per beneficiary per year on contributions effective January 1, 1998. Your children must have their own social insurance number (S.I.N.)

For beneficiaries aged 16 and 17, the CESG is only applicable if there have been RESP contributions for at least 4 years in the past, or if total previous contributions for the children have reached $4,000.

The Government will provide the CESG directly to the plan trustee to be invested in the same plan chosen by the contributor. The grant itself is not included in calculating the annual and lifetime contribution limits.

The grant is allowed to grow as part of your RESP, and is paid to the student upon enrollment in an eligible full-time post-secondary education or training program. If the beneficiary does not pursue education or training, the grant(s) must be returned to the Federal Government. Under certain conditions, however, income generated by the grant may be transferred to the contributor\'s RRSP.

Grant eligible contributions may be carried forward to future years up to a maximum of $4,000 per year, translating into a maximum grant in any year of $800. The CESG room accumulates from 1998 to the year in which the beneficiary turns 17.

As for the actual monetary results, $2,000 invested each year for 15 years equals an investment of $30,000, with a CESG grant of $6,000 ($400 per year), and assuming an annual return of 9%, will grow to $76,250--which should cover the costs of an education at that time, 15 years down the road!