Can you Afford your Child’s College Education?

“Sending ones children to a good college” consistently ranks as one of the top financial goals for most Indian parents. No wonder a plethora of financial products exist that specifically target this goal. However, with rising education costs, a good college degree is unlikely to come cheap in the years to come. Unless one is very wealthy and sitting on large savings, it becomes nearly impossible to have the required money ready in time without having a robust plan in place. Unfortunately, recent research has shown that more than 75% of Indian parents wish they had started saving for their children’s college fund earlier than they did. Given that the quality of your child’s education will make a significant difference to his or her future earnings and career growth prospects, it’s no wonder that this becomes a ‘top of the mind’ priority for all parents.

How much will it cost when my child turns 18?

Any robust plan must begin with an estimation of the future tuition fees you’ll incur when your child turns 18. This would vary greatly according to the type of course – or for that matter, on whether you choose a private or public college for your child to attend. Recently, an MBBS college in Tamil Nadu charged a total fee of Rs. 1 Crore to a student who secured 98.7% in his class XIIth examinations (Rs 50 lakh as tuition fee and Rs 50 lakh in cash as capitation fee)!

A more realistic basic plan could begin with a present-day expenditure of Rs. 6-8 Lacs for a Bachelor’s degree and a similar amount for a Master’s degree (a total of 12-15 Lacs). It is quite reasonable to expect this number to inflate at 8-9% per annum, so the cost would typically double every 10 years or so. If your child is 8 years old, you’ll need to target twice this amount (25-30 Lacs), and if your child is new born, you’ll need to target roughly 50-60 Lacs for the same quality of education. No doubt these are daunting numbers – hence the need for prior planning.

How will I fund it?

Hundreds of thousands of Indian students graduate from college every year. How do their parents manage to make the payments? Truth is, most parents wind up saving less than 100% of the loaded cost (fees plus other expenditures) required for their children’s education. These savings are usually accumulated using a mix of mutual funds, traditional insurances, gold/jewelry and fixed deposits over a period of several years in an opportunistic (not disciplined) manner. The remainder amount is typically funded from other sources, which could include:

• An earmarked portion of one’s current monthly income
• Student Loans, with a moratorium period so as to not put pressure on the child’s finances immediately after graduation
• Partial withdrawals from ones Retirement Fund (not recommended!)
• Gifts from grandparents (very common in India!)

How much should I put away monthly?

Your aim should be to maximize additions to your child’s education fund, preferably in a structured and disciplined manner. Think of it as a ‘reverse EMI’ for a student loan that your child would have to bear later – only this way, the monthly outgo would be significantly lower.

To put this in perspective – the monthly EMI for a 20 Lac student loan works out to be roughly Rs. 45,000. If you save these 20 Lacs systematically over a 15 year period instead, your monthly “outgo” (saving) works out to just Rs. 4,000!

Start with a target amount in today’s terms, and then inflate it by 8% per annum for the years your child has left until their higher studies commence. Then decide how much of this you’d like to save up as a down payment (say 100%, 75% or 50%). Use a financial calculator to determine how much you need to save every month assuming a reasonable rate of return, and then most importantly – track your progress towards this goal on a frequent basis. (FinEdge provides its clients a very useful dynamic goal tracking program called GoalStar which graphically depicts their progress towards pre-planned financial goals over a period of time).

In many cases however, it boils down to saving how much you can afford to, rather than how much you’d ideally want to! To increase the amount of money that you’re able to put away on a monthly basis, consider these options:

• Understand and accept that there are tradeoffs to be made in lieu of your child’s future
• Separate needs from wants - cut back on nonessential spending
• Maintain a written, monthly budget and be disciplined – even small leaks can sink a great ship!
• Invest unexpected windfalls like bonuses, tax refunds or inheritances to your child’s education fund in aggressive return instruments
• Become a ‘double income’ household by having your spouse augment the family income
• Ask grandparents to contribute to your child’s college fund in lieu of gifts

Starting early is the key

It’s rather ironic that the best time to start saving for your child’s college education is when they are very young, and yet this is the most challenging time for a young couple to start saving! Young parents incur financial strains at multiple levels, and many of them are still paying off debt or incurring large EMI’s on a home purchase. Thankfully, the joint family system in India helps cushion the blow to an extent – however, more and more Indian families are now gravitating towards nuclear structures, and this is only exacerbating the financial strain on young married couples.

When your child is young, you can afford to select riskier investments that will have the chance to outpace inflation, versus restricting yourself to instruments such as fixed deposits which grow at a slower pace than do education costs. You can grow a large corpus through regular, small and affordable savings. The effects of compounding can surprise you! Even Rs. 5000 saved monthly from when a child is new born to the time they turn 18 can yield Rs. 37.89 Lacs at a growth rate of 12% per annum.

Don’t feel bad if you can’t put aside thousands of rupees every month right from the start. Start with a small amount, say Rs. 500 or Rs. 1000 per month, and add to it whenever your income or surplus increases can. Your early savings will go a long way in growing and compounding over long periods, and you’ll sleep peacefully at night knowing you’re doing the best you can. After all, well begun is half done!