Scholarship plans
What is a scholarship plan?
A scholarship plan is one of several types of Registered Education Savings Plans (RESPs)
. In a scholarship plan, a fund company pools your money with that of other families with children of the same age and a trustee manages the fund. When the plan matures, each child is eligible to receive Educational Assistance Payments (EAPs) towards tuition.
Before you sign up for a plan, it’s important that you thoroughly understand it, including all of its benefits and limitations. Many scholarship plans offer a number of payout options. Pay attention to them so that you can find one that works best for you. Avoid making a rushed decision at an emotional moment, such as immediately after the birth of a child. Dropping out of plans can be very costly.
What risks do they have?
Scholarship plans have low market risk, because they usually invest in low risk, fixed income investments.
The risk with scholarship plans is that your family’s situation may change, causing you to miss the benefit of having put money aside in the first place. There are often large penalties if you drop out of the plan, miss a contribution or a deadline, if your children do not go to a qualifying school or program, or if your children do not complete their programs. You may have the option to transfer money to another child or simply leave the plan open until your child decides to go to school (as long as it’s within 36 years of opening the plan).
The first few years of contributions virtually all cover fees. This means that if you do not stay invested for at least the first few years, you may get nothing back. Be sure to read the disclosure documents carefully to fully understand the costs and payment structure.
Can you sell them easily?
When you buy a plan, you have a 60-day period to change your mind. Think carefully during that period whether this is the right plan for you. Scholarship plans have high upfront costs and, after this 60-day period, there are large penalties for leaving the plan.
What are the associated costs?
Scholarship plans have high front-end fees. In fact, your contributions during the first few years may go entirely to pay these fees. You will not be reimbursed for these fees if you drop out of the plan. Other RESPs may not have these up-front costs, but some have high management expense ratios (MERs) that reduce your returns. You can also expect to pay enrolment, administration, trustee, and possibly other fees for your scholarship plan. Ask questions and find out any costs that may apply before you invest.
Scholarship plans in relation to other registered education savings plans
There are other types of RESPs besides scholarship plans, many of which offer more flexibility. There are individual, family (where more than one individual can be designated as the beneficiary, though they must be related to the subscriber) and self-directed RESPs, which can be purchased from brokerage firms and financial institutions.
Self-directed RESPs have the greatest flexibility, but, like individual and family plans, they can have higher market risks if you choose to invest the savings in higher-risk investments.
RESPs, including scholarship plans, may qualify for various government incentives that help parents save for a child's post-secondary education, including the Canada Education Savings Grant. Depending on your family’s finances, you may also qualify for the Canada Learning Bond. Some provinces may have other incentive programs for those who qualify. Make sure you claim the grants and bonds you are entitled to. Many people do not.