It is the dream of all the parents to see their children do well in their studies. To realise this dream they must plan for financing their child's education.
A good education is one of the best investments that you can make for your child both in terms of a satisfying career and financial success. However funding education is getting increasingly difficult and requires careful planning.
Here are some tips for getting it right.
Start as early as possible
The earlier you start the more you get compound interest to work in your favour. Ideally you should start saving when your child is born.
Having a longer time horizon will also give you more flexibility to invest in relatively risky assets like stocks.
If you have 15 or more years to go you can afford to put the majority of your funds in stocks where you will probably earn a higher return. As you draw closer to your child's admission you should switch to safer assets like fixed deposits and debt funds.
If you start saving just a few years ahead, it's better to focus on safe assets right from the beginning.
Understand the costs of education
As with any kind of financial planning you need a goal and that means understanding the likely cost of education. You should have a good idea of the fee structure of different courses.
One of the biggest questions is whether you want your child to study in India or abroad.
For example, highly sought after professional courses like MBBS and MBA in India will have fees of around Rs 2-4 lakhs. Regular courses like B.Com have much lower fees and probably won't require significant saving on your part.
Foreign education however is much more expensive especially in the US where fees might cost around Rs 10-15 lakhs per year and annual living expenses might come to around Rs 4 lakhs.
You should also keep in mind that over a long period of time like 15 years fees are likely to increase to keep in line with inflation.
For instance if we assume an Indian inflation rate of 5 per cent, fees will roughly double in 15 years in order to match inflation.
It is possible that fees may rise even faster than this especially if there is significant deregulation of the education sector. It is best to save on the high side since if the money isn't used for education it can always be used for other purposes like your retirement fund.
Explore alternatives to self-financing
Self financing isn't the only alternative when it comes to funding education. Other possibilities include financial aid, bank loans and scholarships.
Financial aid from the university is obviously the most desirable method of financing. And quite a lot is available especially in the US where aid is relatively easy to obtain for PhD students, particularly in science and engineering.
In addition to a full waiver of tuition fees students often get stipends which cover their living expenses.
However aid is much more difficult to obtain for other degrees like an MBA and here students and their families will have to supply the necessary finance. Also remember that even with full aid at a US university, you will still have to fund the whole testing and application process and travel expenses which could amount to Rs 1 lakh.
What banks are offering
Another important alternative are education loans which are available at a number of banks. You can borrow up to Rs 20 lakhs though higher value loans will generally require some kind of collateral or third-party guarantee as in a home loan.
For example SBI offers an education loan up to Rs 10 lakhs for domestic study and up to Rs 20 lakhs for foreign education. The interest rate is 12.75 per cent (floating) for loans up to Rs 4 lakh and 13.75 per cent (floating) for loans above Rs 4 lakhs.
You start repaying the loan one year after finishing the course or 6 months after getting a job whichever comes first.
Education loans are given tax benefits under Section 80E; you can deduct your interest expenses for saving taxes. The deduction is available for a period of 7 years and in effect it makes your interest rate a few per cent lower than the stated figure.
Another possibility is scholarships which are available from companies, educational trusts and governments: both Indian and international. This website has extensive information on scholarships in India and you should also be alert to newspaper ads advertising scholarships.
To conclude, funding your child's education can be a costly proposition but an early start and careful planning will go a long way in getting it done.
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