Dilemma of higher education
months ago, I listened in horror about parents who sold their house to be able to afford an overseas college education for their child. They now live on rent.
Sending children overseas for higher education has become part of dinner conversations among adults getting together on an ordinary Friday night. Usually, the talking point is around how expensive it is. Sending your child for an under-graduate degree to the UK means at least Rs15 lakh a year as tuition fees alone. Add to it living, travel and food costs, you are looking at around Rs25 lakh a year. In the US, private university tuition can cost upwards of Rs30 lakh a year, and in a public university, around half of that.
Cost is important. Given our country’s relative inflation, interest rates and current account balance, it is unlikely that the Indian rupee will strengthen to a level that the exchange rate becomes favourable for us. Overseas education is going to remain expensive for rupee owners and earners.
After establishing unaffordability, the need for going overseas to study is vociferously questioned. There are three reasons that seem to take the lead. First, traditional Indian higher education system rewards only the highest-grade students and there aren’t enough good quality private institutions to absorb the second- and third-tier students. Second, emphasis on rote learning continues; against this the application-based learning system offered overseas has a greater appeal. Last, the choice of courses is vast when you consider studying abroad. These dinner conversations often rely on other people’s experiences to extend the discussion. Rarely does one talk about their own preparedness. This got me thinking. We have twin boys, which means if an overseas education becomes our choice too, it could mean at least Rs50-60 lakh a year in tuition plus living expenses for two.
Immediately, I remembered my college days, overseas. I had two part-time jobs to support my education; my children too will have to slog to get their degree.
Unfortunately, their father doesn’t agree. It’s harder now, he says. What if they study a specialized field? Should they focus on learning or reaching on time for their shift?
Next option, scholarships, I thought. It’s too early to tell though whether our children will qualify. We could try, but I was fast getting influenced by these conversations and the potential prospect of selling assets to fund education did not appeal. There must be a plan B.
Then something else happened. I met this gentleman from the US who came with a proposition to enable families to invest the required $500,000 in an American business with the objective of moving to the country and getting a domicile. The business to be invested in was a fast food chain; you would have to start a franchise. Great, I thought, this sounds like a rational plan for my children to study overseas. America has some of the best institutions. Now to convince their father to move. Before getting to that, I calculated the net return from this proposition, which came to about 1.5% per annum. This means one would need a lot more money to sustain, and even another job.
Moving on. Next option: simply get a job overseas and
I like to use a three bank account system in which all your income drops into the ‘Income’ account. From that your average monthly spends get transferred to your ‘Spend It’ account every month and the rest moves to the ‘Invest It’ account. Now figure out how long a bad streak can continue. Has there been a time that no money has come in at all for a month? For 2 months? For 3 months? Whatever that number, add one month to it and keep that much money in a liquid fund—call it the ‘Bad Month’ account. If you’ve been at zero income in the past for 2 months, then keep 3 months of expenses in a liquid fund. In the month that your income falls short of the budgeted expenses, dip into this fund for the amount you need. Remember to refill when the income flows are good. Figure out your periodic lump sum payments and add that number to your Bad Month account.
Budget a bit more for expenses such as car insurance premium or medical and life premiums, for some people this expense can come out of the regular monthly spend. But if your kid is abroad studying or if you have a large insuranceplus-investment premium due (these are plans that you should discard, but there are those who are still funding these wealth destroying insurance plans), you may need to create more pools specific to those payments. You can add it to the Bad Month account or create one more liquid fund for periodic payments.
Next, create a second layer of security with at least 6 months of expenses in an emergency fund. You can use a short-term debt fund for this. If you are single and have dependants to look after, hike this number to 1 year of money in the emergency fund. The first few times you use this system, you will have to be really strict with yourself, especially in a good month. It helps to immediately move the money from your Income account to your Spend It account and then move the rest to your Invest It account. I would keep a buffer of about 10% of your calculated spend as a backup till your Bad Month account builds up. Of course, your basic insurance covers need to be in place—a good medical cover, a life cover if you have dependants, home cover and car cover are the basic must-haves. Your investment process begins once your cash flows have stabilized and your Bad Month fund is created as is your emergency fund. Then you begin to start investing through SIPS, not before.
Before you rush into the new fad of SIPS, remember that financial security comes from a stable money box with neat cells. Unless your cash flows are in order, defer the plan to begin your SIPS. Begin them for sure, but after you know how much you can spare each month for investment, specially if you have uneven income flows. Mint move. Now to convince the father. “No way,” he said. “The Indian economy is growing. The countries you are talking about have stagnant growth. If the economy is stagnating, why will they accommodate an outsider. At this stage in life, India is where my career is best placed.”
It is hard to argue with that rationale. One may think it’s early for parents of 7-year-olds to discuss college education expenses, but I would say that if it saves us from selling valuable assets, then why not begin now. I am also hoping that when the time comes, there is a significantly greater variety of good quality higher educational institutions to choose from in India itself. If that doesn’t happen, back to plan B.
After eliminating other plans, my only option is to save and invest, be financially better prepared for this possibility 10-11 years hence. It’s not just overseas education that is expensive. Private colleges and even private schools in India are expensive. Spending on education is a certain cost. So, you want to achieve whatever figure you attach to the goal with close to 100% certainty and without disturbing other financial aspects of your lives. Whether it is spending more than expected on school or college, in India or overseas, this is an expense you should plan for.
For me, it’s back to basics. I know the money is not needed for at least 10 years. I also know the purpose is education, maybe overseas. This means the expense will get impacted by annual inflation in terms of both living costs and tuition. I must invest in such a way that the money earns inflation-plus returns. It gets a bit complicated because we are talking about investing in rupees but maybe spending in another currency. Nevertheless, I have identified my aim for this goal—maximise returns. I have time on my side, which supports investing in equity assets. Historical trend has shown that equity has the potential to deliver above-inflation returns in the long term. Moreover, it will be tax-free returns if I hold for that long. I can always switch to a less volatile security closer to when I need the money.
Sounds very boring. I already invest in equity mutual funds with a long-term horizon. So now what? More of the same. I was getting carried away in anticipation of all the potential travel and turmoil the choice of my children’s education could cause. Alas, I will have to settle for the tried and tested buy-and-hold strategy. Nothing exciting there, except perhaps the high probability of achieving the goal.
Lisa Pallavi Barbora is a consultant with Mint.