Students’ savings take a dive

Value of Registered Education Savings Plans hurt by economic downturn

James MacKinnon, economics professor and department head, says students should be careful when making risky investment decisions.
James MacKinnon, economics professor and department head, says students should be careful when making risky investment decisions.
Photo by Robin KisVee

Some students are wondering where they’re going to find the money to pay for their education since Registered Education Savings Plans (RESP) are not immune to the recent economic slowdown.

RESPs are a tax-deferred educational investment plan in which contributions totalling up to $50,000 per child can be made until the age of 31.

James MacKinnon, professor and head of the department of economics, said the students who will see the largest decrease in their RESP funds are those who had the most invested in the stock market. “If your RESP has a substantial amount invested in common stock, there’s virtually a certainty that you have lost money, possibly a lot of money,” he said. “If an RESP was 100 percent in equities, it could have easily lost 30, 35 even 40 per cent. It depends on exactly how it was invested. Very large losses are likely.”  MacKinnon said there aren’t many options available for students whose RESPs have been greatly depleted.

“There’s not a whole lot you can do at this point. You can either move into safer investment or hope that there is some rebound,” he said. “Neither is particularly satisfactory. … If you were 100 per cent equities before then that was not a wise asset mix. I think I would have to bite the bullet and reduce the share of equities in that case.”

Students should be wary of making risky investment decisions, MacKinnon said.

“The standard advice from financial advisors is that when you are saving for something in the relatively near future, you should save in a relatively safe type of investment in order to avoid this sort of thing happening,” he said. “While this type of drop in equity markets is unusual, it is common for equity markets to drop.”

Mackinnon said investing heavily in equities when you know you’ll need the money soon isn’t wise.

“If you’re saving for something you will need in the near future you should invest in something extremely safe like GICs.”

Government Investment Certificates are low-risk, where the principal investment is safe and the rate of return is guaranteed for the term of the investment.

“A GIC is typically for a fixed length of time. The advantage of them is that you know when residence fees are due and when tuition fees are due so you can fix the terms of the GIC so that they coincide with that.”

MacKinnon said the Canadian market has dropped approximately 41 per cent since June.

“The primary factor is the financial crisis. Basically, the world banking system did some incredibly stupid things, and a great many banks as a result are in very serious trouble,” he said.

“Canadian banks as a whole have been much better managed than American and European banks, but there is a very legitimate fear that major banks are going to go broke. So now that governments are basically propping them up, without the government intervention that has happened, some major banks would go broke.”

The bankruptcy of Lehman Brothers bank on September 15 has also contributed to the fragile state of the world’s markets, MacKinnon said. “The third-largest Wall Street bank did go broke. It was probably a very serious policy mistake letting that happen, but it did happen,” he said. “People lost a lot of money that Lehman borrowed from them and that further increased fears that other institutions would go broke. Because of this, the whole credit system has basically frozen up.”

Elizabeth Moore, ArtSci ’11, said her RESP funding has decreased dramatically over the last two months.

“I did have to decide whether I was going to be taking the RESP this term or next term. It affected how much OSAP I was able to get,” she said. “My parents did [invest in equities]. They were planning for the future and it’s been kind of sketchy lately.”

Moore said she isn’t planning on taking out her RESPs anytime soon as a result of the market decline.

“I’ve had them for quite a while. Probably at least five years. We were going to take out a bunch of it this year, but since the stock market is so bad and it’s not doing so well, we decided to hold off and hope it gets better.” Moore said she has no idea how much of her RESP is still remaining.

“I don’t know how much of it is left; I don’t even want to know.”

Moore said she is fortunate she has alternative sources of funding towards her education.

“A summer job is necessary. I’m certainly much more aware of making sure that I save the money I make over the summer instead of spending it on other stuff. It’s definitely made me more aware of my saving and spending.”

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