While Americans are encouraged to save for their children's education through a tax-free investment plan, Canadian children are able to have grants awarded to them at birth. Through the Canadian Education Savings Grant (CESG) parents can start saving for their children's education literally at day one, with the government pitching in for part of the tab.

How The CESG Works
Parents walk into a bank, credit union or other financial institution to open up a Registered Education Savings Plan (RESP). Anyone can contribute, whether it's mom, dad, or a favorite aunt or uncle. Since an RESP is an investment account, it could have fees attached. Parents should be cautious when choosing one that's right for them.

The government then matches the money up to a certain percentage and deposits it into your child's RESP. The extra funds the government deposits are called the Canadian Education and Savings Grant. In 2009, if your family income was below $38, 832, the first $500 you deposit each year is matched by up to 40%, and the next $2,000 would be matched at 20%. If your income is above $38,832, the level of matching on the first $500 is reduced. Each child can earn up to $7,200 in lifetime grants.

Because parents won't initially pay taxes on the money, they have a dual incentive to save for their child's education; they avoid paying taxes and get bonus money for the child's education in the process. (There may be other tax breaks you are missing out on. Check out Tax Breaks For Canadian Families.)

Student RESP Paychecks
Once the beneficiary is enrolled in an approved post-secondary institution they will receive payments called educational assistance payments (EAPs) from their RESP. But students who receive payments from a RESP will pay income tax on their payments. However, the taxes they pay - if any, because students normally aren't raking in a lot of cash during school - will likely be a lot less than what parents would have paid on the same money.

The Catch
If a child doesn't pursue an approved post-secondary education training program, such as college or trade school, within 36 years of opening the account, the government will want the money you were awarded in grants put back. However, those contributions will never be required to be given to the government. (Want to learn more? Read Invest In Your Education With An RESP.)

You will also not have to pay income tax on the contributions you invested. And it is important to note that, although you do not pay taxes on these contributions, any investment earnings that are withdrawn from the RESP and are not used for education-related expenses will be subject to income tax plus an additional 20% penalty tax. These payments are called accumulated income payments (AIP).

Affording an RESP
Even a few dollars per week adds up quickly. For instance, investing $9.62 per week will add to $500 in a year's time. If you met the income requirements, this amount in 2009 is matched at $200. In one year, you would have saved $700, before interest, for your child.

If you started doing this at year one of your child's life, your contribution would be $8,500 before earning any interest. You could receive, if grant levels remain the same, $3,400 from the government. Your son or daughter would end up with a minimum of $11,900 for their education. Depending on what you invest in, this amount could grow to a substantial amount with compounding.

There are also grant programs where if you meet the income requirements, you can get completely free money from the government to deposit into your RESP. For example, your child could be eligible to receive a $500 Canada Learning Bond. If you continue to meet the requirements, you can receive another $100 per year to fund your child's RESP until they hit age 15, up to a maximum of $2,000.

How Does the American 529 Plan Compare?
The American 529 plan is similar to an RESP in that it is an investment vehicle for parents to contribute to their child's education. However, the tax incentive is in reverse. Contributions made to 529 plans are made with after-tax dollars, and the earnings accumulated in the plan grow tax-free, at the federal level. (Read 529 Plan tutorial for a refresher on this plan.)

The biggest advantage of this structure is that you end up paying no taxes on your withdrawals if they are used for qualified education expenses. However, because contributions are paid with after-tax dollars, if parents make a high income, they will have been taxed at a higher rate for their contributions than the student receiving the money. As a tax relief, a majority of individual states do offer state tax deductions for parents' contributions.

As far as getting grant money on top of their investment, the 529 plan doesn't include grant-matching programs. There are two types of 529 plans available: college savings and the prepaid tuition program.

Prepaid tuition programs allow parents to prepay tuition for state universities at today's rates. For instance, if a parent put in $2,000 this year to cover tuition for a semester of school 15 years from now, and tuition rose at a rate of 2% per year, the $2,000 invested would cover $2,692 worth of college tuition. So in essence, this is equivalent to receiving a $692 grant by locking in the tuition at today's level. (Maximize your savings by reading How And When To Switch Your 529 Plan.)

Unlike prepaid plans, which guarantee enough money to cover future tuition, investments in a college savings plan can fluctuate depending on the market, much like in an IRA or 401(k). The risk of this plan is that you may end of with a shortfall that won't cover all your expenses, but at the same time there is more potential for earnings growth.

The Bottom Line
Both Canada and the United States offer programs parents should use when saving for their child's education. But don't stop at education savings plans to gather money for your child's education. Within a year of college, students should also check out - and apply for - grants and scholarships from universities. After all, the more parents can save and the more grant and scholarship money students receive, the less everyone will be saddled with student loan debt.

Interested in other Canadian education savings benefits? Check out Canadian Grants And Tax Credits Fund Education. Are you an American citizen? Make sure you read Choosing The Right Type Of 529 Plan.

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