Plan early to build higher education corpus

With a salary of Rs 1.10 lakh per annum, a home loan EMI of Rs 31,000, Mutual fund of Rs 10 lakh and money back policy in the name of his two children, Rajneesh Pahwa (46) thought he was in a comfortable financial position to fund his children’s education.

Things were going smoothly till Class 10, post which the cost suddenly mounted. Pahwa spent Rs 3 lakh on his elder son’s engineering coaching who could not bag a seat and planned to study at Ashoka University.

“He got into the university, but the fee was quite high at Rs 8.5 lakh for one year of graduation. Despite all my savings, I could not afford it as I had another child. I finally settled for Jamia Millia Islamia, where the fees was still reasonable and the teaching staff decent. Still, my son always cribs. I ensured them decent school education but I feel I should have been better financially prepared for his higher education. My own graduation fee at Delhi University was barely Rs 10,000,” Pahwa laments.

Fortunately, his son bagged an engineering seat in his second year of graduation, however, alarmingly high fee of private colleges forced him to be better prepared for his younger son, who wants to study Clinical Psychology.

In the last few years, the education spending has gone up sharply in India, becoming a huge financial burden on families that are not prepared to absorb the financial cost of private universities and professional education.

According to the Report of the NSSO’s 75th Round survey of “Household Social Consumption of Education in India” conducted from July 2017 to June 2018, education is becoming unaffordable for most working people, and even school education cost is very high.

Planning in advance

“Financial Planning for education is as important as planning for home purchase or retirement or health emergency, and if not prepared for, can mess up your financial goals. Unfortunately, this remains a low priority, forcing people to go for education loans, dig into their retirement fund or pledge other assets. A timely and advance planning makes things easier and will not jeopardise the career goals of your children,” Rajesh Malhotra, a personal Finance expert based in Mumbai said.

Post the pandemic, the education costs have gone further up. For instance, students eyeing admission in the top Indian Institutes of Management (IIMs) will have to shell out more this year as three IIMs — Bengaluru, Lucknow and Rohtak — have increased the fee for their flagship MBA programme from 3 to 35%. Many engineering and medical colleges too have revised their fee. MBBS courses in government medical colleges in Haryana have become costlier with an annual fee hike of 10% to Rs 80,000 a year.

This is a tricky part for young parents as it is difficult to assess the cost when options are multiple and costs are divergent. So, what is the formula? “Generally, the planning is based on the current fee structure, adding 10% yearly inflation, if one is planning for a long period. It will keep them prepared for paying high fees, whether they opt for Indian institutes or a foreign degree. Equally important is to keep in mind the additional cost of education,” Malhotra adds.

Malhotra adds other expenses like mobile and laptop, examination and other fee, books, guides, private tuition, coaching, transportation cost and pocket money form bulk of recurring expenses. This just goes up if they apply for foreign education through exams like ILETS, or GRE or GMAT.

According to a report by Aviva Insurance: “Assuming that your child would pursue his MBA in one of the IIMs or top colleges in India, you should be prepared with around Rs 27 lakh and if you are looking at colleges in UK, Singapore, Hong Kong or US, the overall finance required would be around Rs 1.7 crores”. There are Education loans and scholarships available but they alone are not enough.

When and where to invest

The age of your child plays an important role in deciding how much you need to invest. The earlier you start, the lower the investment amount as it will have longer time for compounding benefit, generating sufficient corpus to fund your child’s education.

“The earlier you start, the better it is. I have been investing Rs 5,000 a month for my daughter, who is 6 years now. To offset inflation, every year I buy gold bond in her name. So, when she grows up and decides on her career, funds are not a constraint. I maintain this monthly commitment so I do not have to fall in a debt trap or she has no burden of education loan to start her career with,” Swati Bansal, an investment Banker said. She regrets how fund constraints forced her to settle for XLRI, while she wanted to go to Wharton to pursue MBA.

Invest in financial instruments which can consistently beat inflation over a long term. A fixed deposit or an insurance endowment plan sold as a children’s plan may not be able to give you the desired corpus when required. Investing in equities – preferably an equity mutual fund through monthly SIPs – can help you achieve this goal.