Financing Your Child’s College Education
Updated: Nov 23
Over 1.33 lakh Indians went abroad this year for higher studies. Lakhs of Indian students travel to various foreign universities each year to pursue advanced degrees in fields like medicine, engineering, R&D, and management. Astonishingly, a sizable portion of these students appeared to need loans to pay for their education. Applications for loans to study abroad have increased by 98% just in 2022. The average value of these application requests is to the tune of $42K.
The cost of education is rising exponentially. As parents, we must accept this reality and work to budget for future educational costs. A simple step like starting an SIP of Rs. 10,000 a month when your child is in kindergarten could work. Compound that over ten years at a modest 15% annual return, and you would have amassed a corpus of approximately Rs. 27.80 lakhs. Furthermore, if your child intends to pursue a degree abroad, some percentage of the investment should ideally be made in the local currency of the target university. For a university based in the US, for instance, investments should be made in assets denominated in USD. This will help to reduce the loss brought on by the rupee's depreciation, which is estimated at 1.5% on average against the dollar.
A similar investment plan with short-term maturities can be used to pay for your yearly educational costs. If you want your child to pursue a degree abroad, you'll need an IB curriculum foundation for their early years of education. The annual cost of the IB program could range from Rs. 50,000 to Rs. 6,00,000 depending on the school you decide to enroll your child in.
Early planning and investment are essential steps to take to make sure that your child's future academic endeavors are not hampered by a lack of sufficient funds. If you have a plan ready and have already begun investing towards your child’s future education expenses, then consider these pointers to ensure your plan is robust.
Keep a safety margin
A degree in India that would cost you approximately 30 to 40 lakhs can cost you upto 2.5 crores if pursed abroad. If your child chooses IIM as opposed to a nearby university, there may be a similar difference. If your plans are still a work in progress, budget for the higher cost associated with that stream, whether it is specific to an institute (like an IIM) or location (India or US).
Education Inflation & Taxation
With rising inflation, the cost of education is rising exponentially too. Education inflation is pegged at 10 to 12% p.a. Students who typically spent ₹20 to ₹25 lakhs p.a. a year ago on visas, college fees, and other expenses may now have to shell out approximately ₹25 to ₹40 lakhs p.a. While planning your investments, it is advised to target a corpus with a margin that is higher than the inflation-adjusted cost.
Review your investment strategy and plans
An invest and forget approach cannot be used for any investment that has been planned with a specific goal in mind. The interests of your child, the possibilities and routes for their educational careers may change. Even the markets that are cyclic in nature are all subject to change. Therefore, as an investor, you must periodically review your investments to see if they still align with your changing objectives.
Investing in the right assets
To begin with, set your investments for education apart from other goals. Consider timing the maturity of your investments to occur before your target date. Make sure there is a maturity buffer of 2-3 years before the need arises, especially in high-risk assets like equity. To ensure that your corpus is not impacted by market volatility and can be quickly liquidated when necessary, switch the investment vehicle to a lower-risk, safer asset class, such as debt or fixed-income investments, once you are getting close to the required corpus.
Take a holistic approach to your finances when planning for your child’s further education. If you start early, know your investment vehicle options, and invest sensibly and consistently. Remember time in the market beats timing the market. If planned well you may be able to pay for your child's comprehensive educational needs without jeopardizing other financial goals.