Savings are at risk when scholarship trust plan rules are overlooked or misunderstood
Key lessons
- Registered Education Savings Plans (RESPs) are complex investment products that usually are invested for many years before the money can be used for a child’s post-secondary education. The scholarship trust plans that scholarship trust dealers offer are a type of RESP that requires investors to follow strict rules about how they contribute, the eligibility of their child, and how they can withdraw the funds. They do not operate like regular savings or investing accounts that grow over time and let you withdraw money at any time.
- Read your plan agreement carefully. If you can’t find it, your firm can send it to you. The terms of the agreement will vary, depending on the plan and the firm. If you have questions, contact the firm. It is your responsibility to have a basic understanding of the scholarship trust plan you have signed up for and how it works. This includes knowing:
- that your investment is long-term and usually locked in for 10+ years
- how much money can be withdrawn from your plan
- what you need to do to access the money in your plan
- the negative impact that missing a deadline can have on the value of your plan and how much money you can withdraw in the future
- how to avoid situations that would cause the firm to reduce or cancel the amount of money you can withdraw from your plan
- You must follow important steps to withdraw money from your child’s scholarship trust plan. These include:
- contacting the firm by the date specified in the agreement and notifying them that your child is ready to begin his or her post-secondary education
- applying to withdraw money from the plan (referred to as Education Assistance Payments or EAPs) each year that your child is enrolled in a post-secondary program
- contacting the firm to defer your plan withdrawals if there is a period of time when your child is not studying in an eligible program
Below, we share two case studies to demonstrate what can happen when things go wrong with a scholarship trust plan.
Case Study # 1: OBSI does not recommend compensation
Consumer is surprised by terms of plan agreement
Ms. Y was a single parent with a low income. In 2000, she opened a Group Plan X with a Scholarship Trust Dealer to save for her daughter’s university education. When she signed the plan application, Ms. Y received documentation from the firm, explaining the eligibility criteria that must be met to withdraw the funds available through the plan. During the summer of 2015, Ms. Y received a letter from the firm advising her that the deadline to access the plan was November 1, 2015.
Ms. Y’s daughter, Ms. D, had enrolled for a four-year university program from September 2015 until the spring of 2019. When Ms. Y responded to the firm in mid-October 2015, she asked to have the funds made payable to her to expedite the payment to address overdue tuition fees. Ms. Y received a cheque of about $5,700, which was the amount of the deposits that she had contributed to the plan over the years.
Every spring from 2016 to 2018, the firm reminded Ms. D to apply for the EAP she needed for tuition by the August 1 deadline. The amount of each EAP was $2,300. In 2016, Ms. D applied for her first EAP in November, after the deadline. For the 2017 school year, she applied late again, in early 2018. In both cases, the firm paid her EAPs, but a late fee was deducted.
For her fourth and final academic year, Ms. D did not return to university for personal reasons and did not notify the firm about her intentions. In early 2019, she received a notice from the firm advising that her third EAP had been forfeited because she missed the application deadline.
Firm follows their plan rules and refuses to pay consumer
Ms. Y contacted the firm with concerns about the forfeited payment. She complained that she did not knowingly forfeit money for her daughter’s education and requested that the firm pay Ms. D’s last EAP. The firm reviewed their records and concluded that:
- they did not receive an application for Ms. D’s last EAP or a request to defer it.
- they had disclosed a comprehensive explanation of the plan’s fees, structure, risks, and beneficiary eligibility to Ms. Y when she opened the plan in 2000.
- Ms. Y should have been aware of how her plan worked because when she opened the plan, she initialed a copy of the plan agreement to indicate that she understood and agreed to all the terms of the plan.
- Ms. Y had the right to withdraw from the plan within 60 days at no cost or penalty if she no longer agreed to all the terms or decided she no longer needed it.
- a 2018 EAP could not be released to a beneficiary because the 2018 EAP season was closed.
Unsatisfied with the firm’s response, Ms. Y came to OBSI.
Our findings
During our investigation, we reviewed the facts of the case and determined that:
- the firm provided Ms. D with sufficient notice for the 2018 EAP deadline and the consequences of missing it.
- Ms. D had not applied for the 2018 EAP or asked to defer it.
- the firm had followed their own procedures and policies when they refused to pay out Ms. D’s 2018 EAP in 2019.
- Ms. Y and Ms. D should have known that the firm could not pay the EAP unless they received an application because Ms. Y had enrolled her daughter in the plan and Ms. D had previously applied for EAPs for the 2016 and 2017 school years.
Based on our findings, we found no evidence to warrant compensation or recommend that the firm pay Ms. D’s 2018 EAP. We explained our conclusions to Ms. Y.
Case Study # 2: OBSI recommends compensation
Changes are made to consumer’s original plan
Mr. and Ms. T were thinking about the future, and in the summer of 2000, they opened a Group Plan A for their newborn daughter, Ms. V, with a Scholarship Trust Dealer. After signing the paperwork, they received an information package from the firm. The documentation explained how the plan agreement worked, including how to contribute, the eligibility criteria that must be met before Ms. V could withdraw the funds and the importance of application deadlines to the plan.
In the spring of 2018, Mr. and Ms. T signed the firm’s application to withdraw from the plan and retain the amount they had earned from government grants. By the summer of 2018, Ms. V was enrolled in a two-year college program for the 2018-2019 academic year.
In the fall of 2018, Ms. T successfully withdrew plan contributions worth about $10,000 to pay for Ms. V’s first year of post-secondary studies. Then, in the spring of 2019, a major change in the structure of the plan was proposed by the firm and approved by a vote taken among the plan holders. Through mailed correspondence, the firm communicated this change to Mr. and Ms. T, explaining that the deadline to apply or delay an active EAP was November 1, 2019 and the consequences of missing this deadline was losing the rest of the plan’s income.
Missed deadline triggers major loss of funds
Ms. V did not continue her college studies in the 2019-2020 academic year. By the summer of 2020, she had enrolled in her first year of a 4-year university program, so she applied for the EAP. In response, the firm said Ms. V no longer had access to the funds and she did not qualify for the EAP because she had missed the November 1, 2019 deadline to request or delay it. This represented a loss of contributions and earnings of approximately $15,000.
Mr. and Ms. T escalated the decision to an appeals committee within the firm, requesting access to the remaining funds they believed they were still entitled to through their plan. The firm refused their request and said the only available funds through the plan were earnings from government grants. Mr. and Ms. T felt that the documentation received from the firm had been confusing and they did not understand what the firm had done with their money. Frustrated, they brought their complaint to OBSI.
Our findings
During our investigation, we reviewed the documentation in Mr. and Ms. T’s file. We found that:
- while the firm provided notice to them of the EAP application deadline, it did not clearly disclose the severe consequences of missing the deadline.
- however, Mr. and Ms. T shared responsibility with the firm for the loss of their plan income because they should have been aware of the options that the firm had given them to prevent the loss of income and they did not take action.
Based on our findings, we recommended that the firm compensate Mr. and Ms. T $5,000. The firm agreed with our recommendation and Mr. and Ms. T accepted their offer.
Related case studies and resources
Understand RESP categories when making withdrawals