Most parents know that RESPs are a great way to help save for your child’s education. But there’s one type of plan that’s giving RESPs a bad name. Group RESPs, or group scholarship trusts, are known for their aggressive marketing tactics and they come with a long list of fees and complex rules.
Group RESPs: Parents Beware
Group RESPs aren’t a scam – they’ll work just fine if you see the plan through to the end – however parents need to be cautious and read the fine print before signing up.
The flexibility of a group RESP is much different from the individual or family plans offered by your bank or credit union.
Here’s how they work:
With a group RESP, your contributions are pooled with those of other people. The money your child gets is based on the amount of money in the pool and the total number of students of the same age who are in school that year.
Usually you’ll need to sign a contract agreeing to make regular contributions to the plan over a set period. Group plans are offered and administered by scholarship or group plan dealers. They may be more expensive than individual or family plans, depending on your investment choices.
Group plans tend to have strict contribution and withdrawal schedules, meaning that if your plans change – a big possibility over 18 plus years – you could forfeit your enrollment fee or affect how much money your child can withdraw when they need it for school.
Here are the five main providers of group RESPs:
- Canadian Scholarship Trust Foundation
- Universitas Foundation of Canada
- Heritage Educational Foundation
- USC Education Savings Plans Inc.
- Children’s Educational Foundation of Canada
What To Ask Before You Open An RESP
Some group RESP providers have fallen under scrutiny from the Ontario Securities Commission for providing misleading plan documentation. Before you choose an RESP provider, make sure you read the fine print and ask about:
- Fees for opening an RESP;
- Fees for withdrawing money from a RESP;
- Fees for managing the RESP;
- Fees for services and commissions;
- What happens if you can’t make regular payments;
- What happens if your child doesn’t continue his or her education;
- If you have to close the account early, do you have to pay fees and penalties; do you get back the money you contributed; do you lose interest and can you transfer the money to another RESP or different account type?
Related: Saving For Your Child’s Education
You can withdraw from a group RESP contract and get all of your contributions back in the first 60 days after receiving a prospectus. If you’re past the 60-day point, you might be better off seeing the plan through to the end. Otherwise you might pay fees upwards of $800 to $1,200 to collapse the plan during the first few years.
Critics of group RESP plans say they are often aggressively marketed to low-income and immigrant communities.
When our youngest child was born, we signed up to receive free samples and coupons from a few different websites. A short time later we got a phone call from someone who asked if we received samples of baby formula. It turns out he was a group RESP salesman in disguise and he wanted to come to our house and talk about setting up a plan.
We avoided a group RESP plan and instead decided to open a family RESP account with our bank. Both of our children are named under this plan, so if one decides not to pursue a qualified education program, we don’t have to worry about closing an individual RESP – the benefits are simply shared by the children that do qualify.
As a young family with a lot of competing financial priorities, we just contribute what we can afford right now – $200 per month – and we hope to bump that up as our kids get older.
We like the self-directed RESP because we’re not tied to a specific contribution every month, plus we have the flexibility to contribute lump sums when our finances allow for it.
Have you had any experience with group RESPs?