Plan now for your kids’ education!

By | August 8, 2013

“If you think education is expensive, try ignorance”. This quote is often repeated to encourage people to opt for education. It has never been truer than today. Education indeed, has become expensive.

The rising cost of education

Consider this; engineering education used to cost about Rs. 5,000 to 25,000 per year 10 years back. Today it costs anywhere between Rs 1 lakhs to 3 lakhs per year. Adding the living expenses per year which is another 1 lakh – 2 lakhs, the cost of engineering education is about 8 lakhs to 20 lakhs for the 4 year programme.

Similar is the case for business education in this country. It used to cost about Rs. 10,000 to 50,000 per year 10 years back. Today it costs anywhere between Rs 5 lakhs to 15 lakhs per year. Including living expenses, the total cost of business education is about 12 lakhs to 25 lakhs for the 1-2 year programme.

Almost every professional education has become expensive and will continue to appreciate in price. There are two reasons for this. One is of course the unbridled inflation and the other is increasing demand which makes it easy for schools to raise the fee at their will.

The future will be tough

Education expenses have appreciated at a rate higher than even the inflation which stands at 2 digits even now. Projecting the cost of business education and engineering education after 15 years will be about 60 lakhs and 40 lakhs (taking yearly increase of just 8%). This is when you don’t even get a guarantee of good education.

Moreover, because of increasing competition for good schools and colleges, most of the students have to take coaching classes where the fee can vary from Rs 50,000 to Rs 1 lakh per year.

Planning for it

Unlike developed countries, where there are specific schemes by the Government agencies (like 529 in USA), India offers no such options. Education is expensive and hence parents have to plan for it on their own.

It is advisable that parents work backward on the savings needed for educating their children. You have to know how much you may need 10 years or 20 years down the line and plan accordingly. Let’s look at the sheet below.

Future Value of a constant stream of monthly payment
Monthly Instalment -15000 -15000 -15000
Number of periods (in months) 120 120 120
Rate of returns 8.00% 11.00% 14.00%
FV 2,744,190.53 3,254,972.08 3,886,033.68

The table shows an investment of Rs 15,000 for 10 years will mature to different future values as per the rate of return of investment. Parents can opt for systematic investment plan (SIP) where a certain amount is automatically invested by mutual fund companies in different schemes as per your authorization. SIP is a good way to beat market fluctuations and build wealth over longer horizon.

The choice should depend on the risk profile of investors too. Debt funds or Government schemes usually give a return of 8% over the long term. These schemes have low risk and are safer investment option.

Balanced fund, a mix of debt and equity, is riskier than debt funds but offer much better returns over longer time. The returns can be anywhere between 8% and 14%. We have taken 11% as the average return over 10 years.

Equity funds are the riskiest but also have potential to offer highest return on the investment. Typically, equity funds give 11% to 18% over long term. Since this fund invests its major part in equity, its value fluctuates widely in short term. Investors, who can maintain patience when the market is down, can reap the benefits later. However, this is not an easy task.

How to choose the right schemes

Parents must look at the funds’ performance over last 5, 10 years. The past performance gives a good indication of its performance in future. There are funds offered by all mutual fund companies giving a plethora of choices to investors.

Secondly, parents can also contact distributors and ask for suggestions. However, it should be verified. Many times distributors sell the fund which offers them maximum commission.

The third important point is discipline to stick with the plan. Never ever think of withdrawing money in between, no matter how small is the amount. These small leakages are the biggest hindrance in building wealth.

Other ways to plan the education expenses

Government is pushing our banks harder to provide education loan to students. It is advisable to parents to look for this option too. You may be doting father or mother but you have to ensure that your old age doesn’t suffer because you spent all your money in your child’s education. Remember that the parents are more vulnerable at old age because there is no regular income. Education loan not only reduces parents’ burden but also generates a sense of responsibility in students who must pay it back when they start earning. It is indisputable that people value what they pay for.

Parents should also do their research on various schools and colleges and help students select the right one. There are few good colleges and public universities which are better than many private ones. The only difference is that they don’t market themselves very well.

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