How to save for your child's higher studies
Worried about finding the money for your child’s education? With prudent planning it can be smooth sailing. Here are some simple guidelines.
By Venkatesh Varadachari
Most of us, parents, start planning for our children’s education as soon as they are born. The bad news is that the cost of education is rocketing, especially at private schools and colleges. The good news is that you have sufficient time to plan for expenses related to your child’s education.
Expenses at the school level
- To start with, it is quite likely that you will be shelling out close to Rs 1,20,000/- per child for school-related expenses every year. That is what most mid-tier schools charge in cities like Chennai, Bengaluru, Hyderabad, etc., as fees and transport expenses. This figure will be slightly lower for Tier-II cities, but not significantly so. (Please remember that the estimate covers only school fees/transport and other such expenses).
- Once the child reaches Class IX (and in some cases, even earlier) you are likely to spend more for coaching classes that prepare students for competitive exams. The fees for some of these coaching classes run into lakhs of rupees.
All this, before your son or daughter steps into a college!
Expenses at the college level
College education costs vary significantly based on location, course, duration of the course, etc.
- If your child studies in a high-end government-aided/run college or university, the costs are not going to be significantly higher than what you were paying for her schooling. For example, if yours is a General Category household with an annual income of over Rs 5 lakhs, the semester fee (excluding hostel fee) will be close to Rs 1,00,000/-.
- At the other end of the scale, if you are going to secure a management seat in a private engineering college away from your home, the total cost per annum can easily come to around Rs 4 lakhs - 5 lakhs.
- If your child is aspiring to be a doctor, the cost of educating him can be about Rs 25 lakhs unless he is an exceptionally meritorious student.
Set your goals and do your math
With such a wide variation in the cost of higher education, the first thing to do is be clear about your aspiration level. Do you plan to send your daughter to the US for higher studies? Or, are you happy to send her to a good college in India? You should take into account your family’s financial situation before making a decision in this regard.
Once this point is settled, the next step is to figure out how much you will need when your child is ready to go to college. The cost of education is growing at double-digit rates throughout the world. Even if you assume that college fees go up by an average rate of 10%, it is doubling every seven years. So, if you have a newborn child and you are planning on an Indian engineering degree followed by a Masters degree from the US, the overseas degree at that time is going to cost eight times what it costs now (The math: the fee doubles every seven years, so over 21 years, it doubles and then doubles and once again doubles for an eight-fold increase). This formula will help you calculate the amount required for higher education.
From there on, all you need to do is work back and see how much you need to save and invest every year in order to get close to the target corpus by the target date.
Save and invest
Why should you save AND invest? Because the rate of increase of fees is way higher than the rate at which your money will grow if you keep it as a bank deposit. Therefore, you have no option but to invest.
- SIP to start
On to the next step. Where should you invest? My recommendation is that you join a SIP in any equity mutual fund by one of the top five fund houses via direct plan. The direct plan cuts out the intermediaries and adds that little bit extra to your investments. This may not look like much initially, but over a 15 to 20-year time-frame, this will ease your burden significantly. This approach is appropriate if you are an early starter in the game of investment. Go to the websites of the fund houses and buy these plans yourself. With enough time on your side, you can ride out the volatility of the stock market. The stock markets in India have returned a compounded rate of 16% over the last 25 years – and this is post tax! (as there is no tax on equities held for longer than one year). This performance is unmatched by any other asset class – gold or real estate on a post tax basis.
- For late-starters
What about those of you who are starting late? If your investment horizon is shorter, reduce your exposure to equities and increase your exposure to fixed income funds. This will reduce your returns but will also reduce your volatility hopefully. What you do not want is for your equity fund to show losses just when you need the money for your child’s college education. You may also have to take some amount as an education loan in this case.
What about those child education products that are marketed by insurance companies or even mutual funds? Well, the math is simple, you need to start early and invest in equity through a product where the cost of intermediaries /middlemen is reduced. That is all there is to it.
- Take care not to be moved by a product positioned to tug at your emotions, and blindly invest in it.
- Check what percentage of the corpus goes into equities, and more importantly the cost of agents/middlemen.
This implies that you steer clear of all investment products sold by insurance companies.
The author is an expert in financial literacy and Director of Money-Wizards.
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