Dilemma of higher ed­u­ca­tion

Mint Asia ST - - Otherviews -

Afew

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.

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