Economy Lab

Liberal plan deserves some RESP-E-C-T

Special to The Globe and Mail

On Tuesday, the Liberal Party introduced a new Canada Learning Passport, which would pay $1,000 per year to high-school students who have an RESP account. (Moe Doiron/Moe Doiron/The Globe and Mail)

Federal financing for post-secondary students rests on three pillars. First is the Canada Student Loan Program. Second is tax-assisted savings in Registered Education Savings Plans and the associated Canada Education Grants/Canada Learning Bonds. Third is a suite of non-refundable tax credits, including the student, textbook, and tuition credits.

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On Tuesday, the Liberal Party introduced a new Canada Learning Passport, which would pay $1,000 per year to high-school students who have an RESP account ($1,500 per year for lower income families). This money would be deposited into the RESP account, to be used by the student if they attend a post-secondary institution. To pay for part of this, the proposal cancels the Student Amount and the Textbook Amount tax credits. For a student studying for eight months, this would mean a loss of $558 of federal credits.

The non-refundable tax credits reduce a student's taxes when taxes are filed. If taxes are reduced to zero, any unused amount can be transferred to the student's parents or can be carried forward to reduce the student's taxes in future years when they are working.

One way to think about the new Passport grant is that it collapses part of the third pillar into the second. That is, it takes the money that would have gone into the tax credits and reallocates it into grants that go into RESPs. This amounts to about $700-million a year (as far as I can tell from this source, if you include the pro-rated share of transferred and carried forward credits).The credits don't amount to enough money to pay for all of the new grants, so the program would require new resources as well.

Is a switch from non-refundable credits to the Passport grant desirable? There are two important features of this switch.

First, the money is provided up front, rather than when taxes are filed next year or in the future. Students earn much more during their lifetimes than those without post-secondary education, but they are cash crunched. Giving them money up front instead of later on therefore may be useful.

Second, there may be a difference in who gets the money. Previous research has found that high-income families are more than three times as likely as low-income families to hold an RESP account. While it's possible the new grants will provide enough incentive to get more participation from lower-income families, it remains an open question. The credits, on the other hand, depend only on filing a tax return that has taxes owing either now or in the future. Whether credits or grants would have better take-up is a tough call, but the key will be making an effort to ensure broad awareness and revamping the complicated sign-up process. The danger here is that the takeup will be as skewed toward high income families as the existing CESG/RESP programmes, meaning that the aim of improving access would be thwarted.

The other political parties and various commentators have found several bugs with the proposal -- ranging from what happens to CEGEP students to how RESP income is treated by provincial and federal student aid programmes. However, with some further work, the Learning Passport proposal shows some promise as a way to transform the structure of funding for post-secondary students.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

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