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How To Save For Your Child’s Higher Education

Some would be tempted to dip into savings and investments meant for other long-term goals like retirement. Never do that.

Graduates during the Columbia University commencement in New York. (Photographer: Daniel Acker/Bloomberg)
Graduates during the Columbia University commencement in New York. (Photographer: Daniel Acker/Bloomberg)

“My daughter is studying in the 10th standard now. She would be ready for college in a few years. I want to be financially ready to fund her education.” A father discusses his financial priorities with a friend to find a possible solution. For years, he diligently saves for the purpose, but, the accumulated corpus is not enough to fund the course of her choice.

As per a study by the National Sample Survey Office, the average cost of private education (primary level to post-graduation) shot up by 175 percent between 2008 and 2014. During the same period, the cost of professional and technical courses increased by 96 percent. Since then, the cost of higher education has climb further, making it difficult, if not impossible, for many families to send their children to the desired colleges.

Let’s return to what the tenth-grade girl would need to fund the education she chooses to pursue.

She will head to college in three years. Let’s assume that she has already decided what kind of courses and colleges she would want to attend. For someone who has not decided yet, it is the first thing he or she should figure out. Accordingly, the student and her parents should start preparing financially. While planning, they should also take into consideration the kind of money they would need to pay for the course. It is also useful to chart out the potential employment opportunities the child is likely to find following the college years. Having some idea of the possible ‘return on investment’ is useful if the expenses likely to be very high.

For the family of the tenth-grade girl, college expenses will commence in just three years.

To find an easy way out, some would be tempted to dip into savings and investments meant for other long-term goals like retirement. Never do that.

If you do, instead of securing your child’s future, you would be jeopardising your own. Instead, can cut down on monthly expenses to start a systematic investment plan or SIP exclusively focused on this goal.

As the time period in in the case we’ve taken up is short, it may be unwise to take a large exposure to equities. Instead, a better option would be to consider debt funds, especially a low-duration fund or an ultra-short-term debt fund. Such funds invest in debt securities issued by various companies, banks and even the government.

The Math

Coming back to the case discussed earlier, here’s how the family can fund their daughter’s dream to study abroad.

Suppose the parents have managed to accumulate a sum of Rs 30 lakh over the years for their daughter’s education. However, the course she wants to pursue should cost roughly Rs 1 crore. They have three years to bridge the gap of Rs 70 lakh. (The assumption here is that they have a fairly good estimate of the amount required at that point of time, and that is also adjusted for the fluctuation between Indian Rupee and the currency of the destination country.)

Scenario 1: Purely Via Investment

They save monthly to accumulate a sum equal to the gap of Rs 70 lakh (The money required to fund the education less the sum accumulated so far).

Assuming that the liquid fund yields roughly 5 percent p.a. (after tax), they need to do an SIP of a little less than Rs 1,70,000 per month.

For an average Indian middle-class family, saving Rs 1,70,000 per month is a near-impossible task.
How To Save For Your Child’s Higher Education

Scenario 2: Mix Of Investment And Loan

In such cases, one may need to explore other options like an education loan. Let us assume that the student can arrange an education loan of Rs 40 lakh from banks, depending on the course and the university. Apart from banks, many financial institutions also provide aid to new students. Prominent universities have tie-up with such institutions. Students should get in touch with the authorities and professors to understand how it can be achieved. Moreover, student loan gives you tax benefit.

Here too, there is still the question of how to arrange the remaining Rs 30 lakh.

Again, assuming that the liquid fund yields roughly 5 percent per annum after tax, the family needs to do an SIP of a little more than Rs 65,000 per month.
How To Save For Your Child’s Higher Education

What To Consider Before Availing A Loan

Any loan has a few conditions that one must take care of. However, for education loans, there are certain specific provisions like a moratorium period. These provisions need to be assessed carefully.

Credit Score

For people with a high credit score, getting a loan is easy, and some banks may also offer the same at lower interest rates. A lower credit score may also mean that you do not get a loan at all.

Check your credit well in advance – much before you apply for the loan.

All credit bureaus offer a facility to check your score free of cost, at least once a year. In case if the score is low, you may take necessary actions to correct the same – by repaying the overdue, etc.

Loan Value Eligibility

Does the money cover the larger part of the education cost? Explore options where it is so. If not, you would need to increase your savings in the earlier years.

Loan Interest Rate

The cost of the loan is obviously a factor to consider while comparing various loan options. Do not forget to compare the processing fees across the options you are evaluating.

Loan Tenure

What is the tenure of the loan? That is, over what period would one be required to repay the loan is an important factor to consider.

A longer-term would reduce the EMI, but the total interest outgo increases.

Evaluate the moratorium period. When does the repayment of the loan start? Ideally, the loan must be paid out of the earning of the student after the studies for which loan was taken get over.

Repayment Options

Can you repay the loan earlier? Can you do part-repayment? Are there any charges for such early payments? Evaluate the options from these angles, too.

Considering these questions should equip you better to evaluate the loan options.

A student can be encouraged to take up part-time jobs and pay the interest amount during the moratorium periods, i.e. the time during the course plus one year after the course, or six months after finding a job, whichever is the earlier. During this time, the borrower is not required to make any repayment. However, the interest amount keeps accumulating to the whole amount. This not only reduces the loan burden but also, a good way to teach the children how to be financially responsible adults.

Amit Trivedi is an author and trainer, owner of Karmayog Knowledge Academy and author of Riding The Roller Coaster, Personal Finance Lessons from the ICU, and The Whole Thing Is That Ki Bhaiya Sabse Bada Rupaiya.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.