It’s never too late to start planning for the expenses of higher education

ADVANCE PREP When it comes to education planning, starting off as early as possible is an important step

When Bengaluru-based Pradeep Jois, 36, met his financial planner a couple of months ago, his primary financial goal was to save for his six-year-old daughter Anvita’s education. “Once Anvita was born, my wife and I realized we needed to plan not just for her education but other things too because she’s a girl child and the society has certain requirements such as wedding expenses,” said Jois. He wants to save ₹20 lakh for Anvita’s undergraduation and another ₹20 lakh for post-graduate education. Since the goal is 12 years ahead, they’ve invested in equity and debt in a 60:40 ratio. They’re investing taking into account the future cost of education. “If Anvita insists on studying abroad, what we are saving may not be enough. We will then move some funds from the wedding corpus and have simpler ceremonies,” said Jois.

While Jois has started investing at a time when his daughter is still young, financial planners say it’s never too early or too late to plan for your child’s education. However, the earlier you start the better because if your investment tenure is longer, the power of compounding works wonders (read: Make compounding an integral part of your investment strategy).

Most planners insist on breaking the goal into two—undergraduation and post-graduation—because many students now prefer going for a specialized masters degree which comes at a high cost.

This Children’s Day, we take you through how you can go about planning your child’s education at three different stages: when she’s a toddler, a gradeschooler and a teenager.

TODDLER

Planners we spoke to said most of their clients regret not planning for education when their child was still a toddler. “It’s never too early. Given that investments are like trees, the earlier you plant them the better,” said Deepali Sen, certified financial planner and founder partner, Srujan Financial Advisers LLP.

One of the reasons why people are not motivated to start saving early is that they don’t have an inkling of what their child would like to do in future. You can overcome this by evaluating the average cost of education in India and abroad. “Take an average of what it costs to study abroad and in India and just start saving,” said Sen.

EDUCATION COST COMPARISON

Given that a lot of children now want to study abroad, investing has to be in sync with the expectations. For instance, an average MBA in India costs about ₹13 lakh-39 lakh, but the same degree in the US can cost up to ₹1.5 crore. You will also have to account for inflation which will balloon up the expenses further. “Once you have the target amount after taking inflation into account, go backwards and see how much you need to save every month,” said Sen.

Of course, you have other goals to fund as well, so it’s important to keep two things in mind. First, prioritize your goals (retirement and child’s education). Second, get your asset allocation right. If you start investing when the child is a toddler, you will have a good 14-16 years to invest, so putting your money in a well-managed diversified equity mutual fund would work well. As you near your goal, you could gradually shift the money into a liquid debt fund.

Finally, understand that not planning in advance could mean disrupting your other goals.

GRADE-SCHOOLER

When your child is 6-12 years old, you have fewer years to invest. “If the schooling itself is very expensive, then you won’t have the investible surplus for undergraduate and postgraduate education. Hence, it is important to take up a budgeting exercise to understand your current cost of living. Divide this into fixed and variable expenses. You can’t do much about the fixed expenses but try and cut down the variable ones,” said Nisreen Mamaji, certified financial planner and founder of Moneyworks Financial Advisors. She added that spending too much on school education and not saving enough for higher education is a mistake parents often make.

Also, at this stage you may not be able to direct your entire investible surplus towards education, because you also have to save for other, equally important goals such as your own retirement. Fortunately, you would have about 30 years to reach this goal but that doesn’t mean you should neglect it.

For your child’s education, in particular, start saving in a large-and-mid-cap fund. However, don’t stress if you are unable to save a large amount.

At a later stage, you can consider taking an education loan, if the need arises. One solution could be children helping with the repayment of the loan and parents providing a collateral to get it sanctioned in the first place.

Education loans offer tax benefits as well. You could factor in taking an education loan, when the need arises. According to Section 80E of the Income-tax Act, the borrower of an education loan can claim a deduction on the interest paid. There is no limit to the amount that can be claimed as deduction under this Section, but its available only on the interest portion. It can be claimed for a period of eight years, or till the time the entire loan is repaid, whichever is earlier.

“Get structured in your thinking and plan your SIPS accordingly, and know which SIP is serving which goal. If you feel you would have to compromise on other important goals, then let the child take on the responsibility of his or her postgraduate education (by taking on an education loan),” said Mamaji.

TEENAGER

If you haven’t planned anything by this point, it could leave you in a state of panic. By now your child is already a teenager so it’s important to be realistic about the education goal. Having goals such as wanting to save ₹1 crore in five years may not work if you can’t set aside a substantial corpus and are hoping your investments to do the hard work for you. “If you’re starting to plan at this point you will need to start living on a tight budget because the amount to be saved and invested would be quite high. You may also need to reconsider the target amount based on your saving capacity,” said Mrin Agarwal, financial educator, founder director of Finsafe India

Pvt. Ltd and co-founder, Womantra.

In case you feel the goal is too close and the target amount too high, have a discussion with your child and consider alternatives. Agarwal suggests not keeping the child away from money matters because it’s important for her to understand the sacrifices you are making. Encourage your child to register for scholarships. “Indian parents emphasize on good education and parents go to any length to provide this even if it’s not affordable. This is not a good idea because it could make the child take you for granted,” said Agarwal.

At this stage, when the goal is between four to six years away, short-term debt funds would be a good choice for investment because it is not advisable to take too much risk if the goal is very close.

If the child is opting for an education loan, know the costs. “Typically a loan is offered at an interest rate ranging from 5-15% with a mandatory guarantor for a bank loan over ₹4 lakh and collateral for a loan over ₹7 lakh. The tenure is usually seven years. Banks offer loans either to the sponsor where the EMI begins as soon as the loan is disbursed or to the student where there is a stop gap period before the EMIS begin,” said Tripti Singh, educational counsellor, post grad services, The Red Pen, a Mumbai-based global education consulting firm.

HT TAKE

When it comes to education planning, starting off as early as possible is an important step. Have a fool-proof financial plan and map it with your income and savings. Sen said she’s seen parents go overboard with their child’s higher education. “Education is critical but giving your child the best education need not necessarily be an expensive affair. Do proper due diligence about the colleges to ensure you are putting your money where your mouth is,” said Sen.

While you may be excited about sending your child to the best institution, don’t forget you have other responsibilities to service. Also, never compromise on the contingency corpus just to fund the child’s education because in difficult times, you will need that money. Work with a financial planner if you need further clarity.