Paying for Spouse's Education with Savings vs Line of Credit vs RRSP (LLP)

Question

My partner is currently going to school with no income, and I have been working for a number of years with a reasonable income (enough for savings, RRSP (Registered Retirement Savings Plan) , trips etc.). We will be getting married this summer and as such she will no longer be eligible for student loans (as my income will be included as household income and push her well above the maximum threshold for student loan eligibility). As I see it there are a couple of options that could be undertaken. For the coming year the education fees will exceed the $10k maximum so I would likely look to withdraw the full amount eligible.

• Pay for her education in cash savings (currently in a high interest savings account - set aside for a rainy day fund. Once depleted I would begin building this up again, and if disaster struck I could withdraw from an investing account). Opportunity cost for this option is the loss of potential savings on 10k $60/year based on current interest rates in my savings account where it currently sits, but as I would then be refilling my savings account I think it is most appropriate to take the opportunity cost from having this invested ~5-10% return.
• Pay for schooling with a line of credit, in her name, which she is pre-approved for already but has not yet used as student loans don't accumulate interest until after schooling does whereas lines of credit do. The current rate for this is 3.95% and tracks against the prime lending rate, so could go up or down in time.
• Withdraw from my RRSP as a part of the LLP (Lifelong Learners Program. This withdraw is tax free but needs to be paid back within 10 years of school completion. With this option I would be losing out on potential earnings in my RRSP but this withdrawal would not be added to my income. My RRSP is quite conservatively held compared to my investment account so opportunity cost would be ~4-6%

At face value it seems to be obvious to use the line of credit, but I am curious if I am missing out on something as it seems like this situation was designed for the LLP.

Answer 1

Why not a 4th, but arguably better option? Normally with big money decisions there is always another option! Why not Cash flow the 15k?

Why you wouldn't go for:

• Option 1 - Never reduce your emergency savings unless for true emergency. Known, upcoming college expenses is not an emergency. Also, an emergency fund isn't used as an invest, and should be kept liquid (think savings account or money market). You don't make money on it - it's there to let your investments grow while the emergency can be handled. It's insurance for your investments. So you wouldn't want to take out investment money to cover an emergency if it does happen - which you mentioned

• Option 2- Don't take out loans when you can cash flow an event. Don't pay someone else interest when you can be making interest. Now you may think that because the interest rate is low that you can invest that money to make a higher interest rate (I can make 8% which is higher than 3%). But let me rephrase the question when we look at it from a balance sheet's perspective: Would you borrow 15k on any type of loan (Student Loan, Line of Credit, HELOC, etc.) to invest in the market place? That is essentially what you are doing. If the answer to that question is yes - then that is a different story and your risk tolerance may be higher than some!

• Option 3 - Life just happens. How strict are you with your money and how good are you at keeping long-term commitments? 83% of people can't hold New Year's resolutions. Evaluate if you are truly the other 17%. When life happens, long term, 10 year pay back commitments are hard to keep track of. Another reason why not do this is because you're pulling out your investment money! Granted, this is penalty/tax free (which may be a ton of paperwork to do correctly, by the way) but you could be making a lot of money in the long run by making compound interest work for you.

Why you would go for:

• Option 4 (Cash Flow) 15k a year is doable with two incomes! I think this is a reasonable cost for a good, usable degree. If needed, temporarily stop investing to cash flow the school. Also, she may be able to work while in school. I remember working 3 separate jobs and graduating without having to take out loans - I graduated with above a 3.5 GPA. This is done all the time by students and you can do it too! She can also apply to scholarships or look for internships that have tuition assistance to help offset the 15k cost. By cash flowing the school, you have all of life ahead of you debt-free. Interviews are easier to take when you don't have student loans to pay back - you can take your time finding the right fit. Without loans, you can invest for pure profit and let compound interest continue to work in your favor! This would allow you to keep all your investments and emergency fund in tact and provide a comfortable amount of breathing room for your life to come.