In a Nutshell: Open a self directed RESP for your kid. The group scholarship plan has worse returns than a mix of 4 easy to buy ETFs. There is no lock in when you go self directed RESP, there are all kinds of lock in problems with a group scholarship plan. Now there are single ETFs to give you all the balance you need to make it even easier. Yes you can get RESP grant money from the government for a self directed RESP, group scholarship plans are not the only way to get grant money no matter what they make it sound like. Open a self directed RESP!!

Self Directed RESP or a group scholarship plan?

Yay... our parents opened self directed RESPs!
“Open a self directed RESP!!”
I just reviewed the documents associated with a popular group scholarship plan for a family member. If you don't know about these things, good, avoid them. If you've heard about it, I'd run away now while you can. I used to work as a lawyer having graduated from law school, I've got an MBA, and I'm good enough with personal finances that I'm able to live off my investment portfolio indefinitely... and I find it hard to understand the ins and outs of a group scholarship plan prospectus. Imagine being a complete beginner, faced with the stress of trying to feed and keep your baby from crying while trying to ensure your child's future education funding, while faced with a commissioned group scholarship plan sales person filling your ears with sales pitches... what are your chances of really understanding what you're signing up for?

When I think of all the fees, lock in, and lower performance of a group scholarship plan and their commissioned sales people who try to sell you on their plan... the immortal words of Michael Jackson come to mind... 

Someone's always tryin'
To keep my baby cryin'
Treacherous, cunnin', declinin'
You got my baby cryin'

I said you wanna be startin' somethin'
You got to be startin' somethin'

That somethin' you got to be startin'... is a self directed RESP. Do yourself a favour, go to your bank and ask to open a self directed family RESP. Put in what you can each year (if you put in $2500 each year per kid, you'll get the maximum federal grant of $500 per kid and do that annually until you get the lifetime $7200 grant per kid... which is just over 14 years of putting in $2500 a year per kid.) Buy one whole market equity and bond etf. I've talked about them before. In the early years you can be more aggressive with growth so maybe go with VGRO.TO (ages 0 to 10), then shift to a more balanced ETF like VBAL.TO (ages 11 to 15), and then as they get closer to needing the funds you can go more conservative with VCNS.TO (ages 16 to university age). The fees will be minimal with a self directed RESP compared to going with a group scholarship plan.
You wanna be startin' somethin'... like a self directed RESP!
​​​1. THE FEE COMPARISON

SELF DIRECTED RESP

If you open a self directed RESP family plan at my usual example of TD, your fees will be $25/every three months plus $9.99 everytime you buy a stock or ETF. If your household accounts happen to have $15,000 in them then the $25 fee goes away. So, if you have $15,000 in household accounts and buy an ETF once at the beginning of each year with all the money you've saved the year before, your total annual fee would be $9.99. If you don't have $15,000 in household accounts but you have three transactions every three months in your self directed RESP, then the $25/month fee goes away. But you'll have spent $29.97 in fees anyway. So the realistic range of fees at a TD Self Directed RESP is $9.99 to $119.88. 

I only had to read two paragraphs on the TD website to figure that out.

If you want to get out of any of the investments, you just sell your ETF for a $9.99 fee. You keep all the Canada Education Savings Grants and you keep all the gains your ETF has made. No penalties for making changes. And it's a family plan so if one kid doesn't go for further education, your other kid can have it. 

So in summary, $9.99 to $119.88 annually with a TD Self Directed RESP. Easy, simple, cheap. (And it's pretty much the same at any Canadian bank if you don't like TD.)

GROUP SCHOLARSHIP PLAN

Fees with a group scholarship plan are a bit more complex, I looked at one of the popular ones and I had to wade through their 69 page prospectus to find the details. For example for the group scholarship plan fees are as follows:

Group scholarship plan for the family:
$50 to open the plan. Fees of 1.14% each year on all your portfolio in the plan. So if you have $3,000 in your plan in the first year, that's $34.20 in fees. If you have $30,000 in your plan as your kid is getting closer to going to university, that's $342.00 a year in fees. 

If after 60 days from your application date, you want to get out of this group scholarship plan because you think it's underperforming, you will lose all the income made on your investments, and you will lose all the government grants as they are returned to the government.

Group scholarship plan for an individual:
Fees are similar for the group scholarship plan for an individual child as are the loss of income and government grants if you want to get out. $50 to open it. 1.14% fee so $34.20 on $3000 portfolio or $342.00 fee on a $30,000 portfolio. Why give away that much money?

Group scholarship plan based on a group of investors:
The group of investors plan is more onerous. It involves buying units in the plan. The fee per unit is $200 and can be between 3.1% and 24.1% of the cost of a unit! Do you want 24.1% of your investment to go to costs?? I'll answer for you... no! Plus that's not all, $10/year for monthly contributions or $6.50 per year for annual or $4/year for annual contribution over 2 years, or $3.50/year for single contributions. AND... a 0.62% fee on your assets. So if you have $3000 in assets that's $18.60. If you have $30,000 that's $186 each year! 

If you miss a contribution for whatever reason you could be in default of your plan! (In a self directed RESP you put away money when you want, when you have the money...). You also have to make up for what the contribution would have earned if you had paid on time. If not you can be in default and you could lose all the income earned, all the government grants and you could lose all the money you paid for the unit fees though you'll get your contribution money back. 

​2. HOW MUCH WILL YOU HAVE WHEN YOUR KID IS READY FOR UNIVERSITY?
$28,737.33 for one year at UofT today... how much will it be when your kid goes to university?!
This is the real question isn't it? I mean, why else are you investing in an RESP if not to get as much money as you can for your pride and joy to go off and get an education? And by the time your kid is ready to go to university chances are it will be even more expensive than what you currently think it is! 

A quick look at the UofT website shows undergraduate bachelors tuition fees around $6,400 to $8,200 a year not including books, and anywhere from $10,000 to $30,000 a year for graduate programs. Residence and meal plans look to be around $14,000 for 8 months. 

So really you need as much money as your money can earn. That's why you might want to take a much closer look at the returns from a group scholarship plan and compare it with how opening a self directed RESP invested in a few ETFs might perform.

Here I'll compare the performance of a popular group scholarship plan from 2008 to 2017 with a mixture of ETFs. 
Rather they be buried in books than student loans?
So going with the popular group scholarship plan gives you all the headaches of the lock in and losing your earnings and government grants if you want to get out... PLUS it seriously underperforms an easy to do self directed RESP of just 4 ETFs. 

The above table assumes you put $2500 each year into your RESP on Jan 1 and get the government matching grant (CESG) of $500 each year. The popular group scholarship plan provided information for the past 10 years so I used that information to do the comparison with four ETFs to see what performs better. 

I didn't dig around to find the best performing ETFs I could find. I just picked the first ones I could find with performance information going back to 2008. SPY is a US stock ETF. EWC is a Canada stock ETF. VEU is a global stock ETF exluding the US. And BND is a bond ETF. 

If you had invested $2500 a year since 2008, getting the government grant of $500 a year, you'd essentially have $30,000 by the end of 2017 just from that. Not including any growth from your investments. So then given how much university costs, we would want to see how much more your investments were worth over and above that base level of $30,000. 

If you invested in the popular group scholarship plan it would be worth $33,036.98. A gain of only $3,036.98 after 10 years of investing with them! That's 10% total after 10 years!

Everything else I picked performed better. Even just going with a bond ETF performed better. BND left you with 9% more money than the popular group scholarship plan. 

Mixing all four ETFs left you with $45,366.16 after 10 years, or $12,329.18 more than the group scholarship plan left you with after 10 years. At the UofT undergrad cost of $6,400 in tuition, that's almost 2 more years of tuition paid for by doing a self directed RESP with a mix of 4 ETFs randomly selected, compared to investing with the popular group scholarship plan.

If you had just invested in the US ETF SPY, you'd have $63,125.95 after 10 years. That's  $30,088.97 more than what you would have had with the popular group scholarship plan. Or almost 5 years more of undergraduate tuition at UofT's current prices.

To me the choice seems clear, self directed RESP is the way to go.

3. SO HOW DO YOU INVEST FOR YOUR SELF DIRECTED RESP?

The question you have to ask yourself is, why are you going to the popular group scholarship plan for your kid's RESP? If you're worried about risking the principle, just know that the group scholarship plan also invests in bonds and some equity now. Why not do it yourself and outperform their portfolio. If you're worried that you don't know what you're doing, isn't it worth it to do a little homework to make sure your kid can get more years of university paid for?

If you're worried about picking the right ETFs, don't worry, you don't even have to find four ETFs anymore. 

As I've explained before, Vanguard has 3 complete global equity and bond ETF portfolios that they rebalance for you. Here's the information again. 

You could go with the growth ETF, VGRO when your kid is furthest away from university years and you can take on some more portfolio risk. Maybe from date of birth to age 10 you go with the growth portfolio. Then as they get a little closer to university, you switch to the balanced portfolio option VBAL from age 11 to 15. Then as you get even closer to unversity and you want to make sure the money doesn't shrink due to a stock crash or economic recession you shift over to a more conservative portfolio with VCNS when they turn 16. If you watch what's going on in the markets you can get a little tighter on the timing of the transitions from growth to conservative.

Really though, with university tuition rising, the fear shouldn't be losing the savings you put into the RESP, you should fear not allowing it to grow as much as reasonably possible and not having enough when it comes time for your kid to go get a higher education. And so you should probably look to the option that gives your child the best return on your investment with the level of risk that you are willing to take.

Based on the analysis above, it seems the popular group scholarship plan comes in last place in that regard, and a self directed RESP invested in ETFs is a much better option. Take a look for yourself and see what you think.

Now remember, I'm not a financial advisor, and I have no tax expertise either. So do your own research and due diligence on the ins and outs of RESPs. Seek financial advice if you need it. Consider this just one person's opinion on the options out there for RESPs. You must decide for yourself what is the best way to invest for you and your child's education funding.

Be a SmarterSquirrel... Save. Invest. Enjoy.


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Lessons Learned:
  • You can open a self directed RESP at the bank
  • Once it's open if you contribute $2500 a year per child (or more if you like up to a lifetime $50,000 max per kid), you'll get the government grant of $500 per year per child to a maximum of $7200 per child
  • You can invest in ETFs in your RESP and it's easy and you don't have to worry too much
  • Vanguard provides whole market equity/bond ETFs like VGRO, VBAL and VCNS
  • When your kid is really young you can invest in growth ETFs, as they get older you can shift to balanced ETFs and as they get close to university age you can shift to conservative ETFs
  • The popular group scholarship plan underperformed the 4 ETFs I looked at, over the last 10 years
  • The ETFs I looked at would have given your child more money for their education than the popular group scholarship plan
  • You can get out of ETFs by paying $9.99 to sell and you keep all the investment earnings and Canada government grants, if you get out of the popular group scholarship plan, you lose the investment earnings and government grants
  • University costs a lot, no really like a lot... like the cost of a brand new Honda Accord every year per child... so you want your RESP portfolio to grow as much as possible... you can't afford to be too conservative too soon...
  • No one can hurt you now, because you know what's true, yes I believe in me, so you believe in you... help me sing it... ma ma se, ma ma sa, ma ma coo sa...
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