Planning for Children’s Studies – Higher Education

Children’s education in today’s world needs strategic financial planning. The cost of providing education is quite high and it also depends upon multiple facets. However, that does not mean that children should be asked to compromise their goals. 

“Education begins the moment we see children as innately wise and capable beings. Only then we can play along in their world.”-Vince Gowmon

We are living in a highly competitive world with many possibilities to explore. The various educational courses offered by different institutes all around the world provide many options to choose from. And gone are the days when parents used to decide what their child/children will become. To a certain extent, parents have to make decisions like opting for a state board or CBSE board, or any other curriculum that they wish for their children. But as they grow, their abilities and interests drive them toward making independent choices. The career-building process for children is a long journey for both the child and the parents as well. 

Parents spare money for their children’s education depending upon factors like what they want to be, and how long they need financial support from their parents. There are other things that should be given due weightage. The decisions made about the choice of schooling and higher education will have a substantial impact on parents’ investment and other monetary plans.

The article is meant to help the readers to plan for children’s education in a systematic manner. Let’s first think about a few basic steps:

• The type of curriculum such as CBSE, ICSE, or a state board.
• Field of education that your child wants to pursue a career in, like arts, law, engineering, medicine, etc. 
• The need for the parent to support the children till a certain age. How much do they want to spend or can afford to keep their other goals unaffected like retirement planning?
• Is the child going to study in India or abroad? This could impact the cost aspect completely. Studying outside India will again depend upon the factors like availability of scholarships and other finance programs. Both the undergraduate and post-graduate courses are available. Which one are you going to choose?

Until the child attains an age where they are able to make decisions about their education, the parents are prepared, yet the amount of uncertainty involved makes it a constantly adaptive process. One needs to make constant upgrades by looking at the probability of finances involved in children’s education. 

As parents, it is normal to want the best for your child. Your concern for them could be the best thing for them in this world. So it matters what you decide for them. A large part of the savings should be invested in a way that entails you give them the bestest kind of opportunities. Once you have children, you need to start planning as soon as possible. 

Let’s study an example. Mr. Sharma has a 4-year-old daughter. She will graduate from school after 14 years. Considering the possibility of the child pursuing her career in medicine, Mr. Sharma sets aside a sum of money equivalent to the cost of graduation in today’s terms which is Rs. 3 lakh. ( Assuming that from first to 12th standard usually, the tuition of fees of the schools are roughly around Rs. 1.5-2 lakh plus other expenses like transport, books, and uniform) per year in any big city) 

Thus, Mr. Sharma shall have to invest Rs. 2635 per month to meet the cost of education at the end of 14 years, assuming a rate of return of 12%. But if he needs this amount after five years, then naturally the amount to be invested will increase considerably. Hence, one should start planning early to spread out the investment amount over the coming years. 

To effectively put your plans into action, an individual may adopt the strategy discussed in the following paragraphs.

1. Start planning early–If you start early, your contribution is spread out over a larger number of years. That way the amount to be set aside is small as compared to when you start planning late. For each of your children, it is necessary to start planning during the initial years of their schooling. The stress of pulling out funds from your investments at the last moment will cost you heavily. It will surely impact the overall financial planning. Better you figure out the sum of money needed and start investing your savings smartly.

2. Set the Educational Goals by making the closest possible choices-First of all estimate the cost of education. As we have already discussed, it depends upon where you want your child to study, in which stream, and what country. Is it going to be an undergrad program or a postgraduate one? You may like to know the cost of education under both the scenarios, the first one being in India, another outside India, and find out the cost depending upon pre graduate and postgraduate programs. Inflation and other factors add to the total cost of educating children. It’s not possible to spare funds all of a sudden for any unprecedented changes in the plans. So if you have a close idea of the choice you are going to make, start preparing for it now by making a provision for probable additional costs. Expenses like accomodation and other pocket expenses do not look substantial as compared to tuition fees, but when added together, they add up to a large amount. Student insurance is a must at many places if you plan to send your kid aboard. 

Set aside the sum systematically. Either choose systematic investment plans in mutual funds or a recurring deposit with a bank. The corpus has to be created in a step-by-step manner and it cannot be done overnight. Invest regularly else you might be left with the only option of personal loans. Taking loans will further add to your financial burden. If you are able to save a larger amount of money then think about investing it. A portion of your income goes towards the household expenses, other expenses and a part of it should be kept aside for emergencies too. Saving money is a good habit but investing it smartly can only help resolve many problems. You can think about equity mutual funds if the time horizon is more than five years. Because such schemes earn higher returns over a longer period. As you reach the required amount of corpus, reallocate your portfolio and make it balanced with fixed income yielding options or debt funds. 

3. Diversify your portfolio-Balance your portfolio through diversification across different asset classes and adjust them according to the risks that they carry. In case any of the assets fails to perform as desired, or underperform,, it should be combated by other assets. The portfolio should secure the ultimate goal of creating corpus meant for educational purposes. You may use index and low-cost equity or else debt/fixed income generating plans to reach your goals.

4. Make a provision for emergencies-Despite you try to add as many expenses as possible, there still remains a scope for unprecedented expenses. Few things are not under one’s control. And investment goals might get distrubed when markets are vulnerable. This is a factor that’s not personal but universal. But that surely affects your planning. Liquidity is something and you can benefit from markets when they are volatile by buying when the investment opportunities are cheaper. Use your surplus cash when markets are not good. You might have to let go of the opportunities to invest when the market is not favourable. To have sufficient funds at your disposal is a must. 

As against this, an individual might face problems like loss of job or an illness that stops him from functioning fully. At that time keeping the same lifestyle becomes challenging when income also stops with work. You can keep a certain amount of money in a savings account so that you do not have to break other investments in case of need. At Least six months to a year’s monthly expenses should be set aside to give your enough cushion against emergencies. Medical emergencies should be taken care of by providing for health insurance. 

5. The need to have a plan B-Always think parallely about another plan if your current plan fails to work. You may think about getting an education loan when there is some change in the original plan. Though nobody wants their plans to fail, always be prepared for a ‘what if’ scenario. You may also have to think about putting your children in a local or an Indian educational institution though the initial plan was to send them abroad. 

6. Keep investing more by taking informed decisions-List down your assets and liabilities. Ascertain your current financial standing. For example, if you need Rs. 50 lakhs for your child’s education in the next five year’s time, you can choose debt securities instead of equities due to the higher amount of risk involved in the latter. 

There are other goals too other than children’s education and hence sufficient provision needs to be made for that too. So it is always better to know what kind of investments you have already made. They might be of help towards accumulating the desired goals. A PPF account in your child’s name, fixed deposits, mutual funds etc. whatever you have, first ascertain their current value. Do not use them if they are meant for other purposes. Or while setting aside funds for educational goals, do not jeopardise other financial plans blindly. Retirement plans and home loans are the top most among them. You can stay ahead of your goals by increasing the contributions from your increments, bonuses etc. This may help to upgrade the original goals. For example, affording a college that has recently become renowned for its performance. Or that you may achieve the target prior to the set number of years. The spare funds can be kept aside for some other goals. 

If your portfolio is reviewed thoughtfully every few months, you can save yourself a great deal of hard work for your hard earned money. Asset allocation and its management is very crucial. But once it is done, you can easily manage to reach your desired goals. Depending upon your risk appetite, you should plan out your investment strategy. Do not forget that any unplanned moves keep your children away from their life goals. So if you need, you can take help of a professional advisor to help you out, while investing your funds. 

Insurance is another important must haves to have in your checklist. If something happens to you, who will take care of the interests of your family including your children? Sufficient funds must be there to achieve your family goals even in your absence. Ensure your health optimally. Medically emergencies call for a large amount of funds. If something happens to your life or health, the other goals will naturally suffer. 

7. Allow amends and avoid rigidities-Children education products like child insurance policies pay at pre-defined frequencies. But the exact time when you might need the money is not known. Also the amount cannot be predicted with exactness. It is better to invest in plans without lock-ins. Pay-outs at a certain age will not be useful. Education counsellors can guide you about the type of courses, and availability and procedure to get admission into a particular university. That way you can roughly predict the amount needed to fund the expenses. However, there are constant additions to new colleges and institutions and the cost of educating your child at the very time of them reaching a particular age, say 18, is a tough task. Plan in a way so that you can change the strategy by adjusting the money in the educational corpus. 

Here is a case study to further explain the points discussed above.

Mr and Mrs Shah have a son, Amit. They want to plan for their Amit’s education. Like any other parents, their goal is to provide him the best kind of education possible. 

Mr. Shah is aged 35 years and his wife 30 years. Both of them are earning Rs. 1,00,000 and Rs. 50,000 respectively. Thus, the total family income is Rs. 1,50,000. Amit is 3 years old. Their household expenses amount to Rs. 40,000 per month leaving Rs. 1,10,000 as surplus. 

The assets that they hold comprise of the following:

The value of a self occupied flat is the major component of the total assets. Hence, it is excluded from the education planning corpus. The cash can be used for emergencies and gold is in jewellery form. 

What is left after setting aside the above assets is equities and the balance in PPF and EPF accounts. The total comes to Rs. 12,00,000.

Amit’s probable educational expenses

By the time Amit will complete his graduation and post graduation, the total amount of funds needed will be Rs. 20,88,624 and Rs. 91,73,864 respectively. The current cost of which is Rs.20 lakhs. The time left before the goal must be achieved is 19 years when Amit will be 22 years old. 

Assuming that the investments are made to achieve this goal in monthly SIPs and they yield a compounding rate of return of 12%. Mr and Mrs Shah shall have to invest a total of Rs.14,560 in monthly SIPs. 

Moreover, apart from educational fees, his wedding expenses etc. form part of the financial planning. Since they own a house, there is no allocation made towards the housing loan. Otherwise, repayment of the loan also takes away a big portion of your savings. Shedding such debts again needs a thoughtful approach. In the above example saving money for retirement is necessary assuming no other liabilities are there. 

Few other points that you should keep in mind:

• Education is one of the most valuable gifts that you can give to your child. As a parent, it is your duty to educate them in the best possible manner. 
• What worked for somebody else might not fit your case. Each individual’s life goals and financial responsibilities differ. So does the strategy to deal with it. Do not follow someone else’s plans to achieve your own, unique goals. 
• Make a plan first and then start taking steps to achieve it as soon as possible. 
• Analyse your financial status by taking into consideration your assets and liabilities. Accordingly, set a smart investment strategy that is flexible enough to allow changes but is capable of helping you reach your goals. The ultimate goal is to accumulate funds as per the plans. 
• Never jeopardise other goals and if needed take advice from a financial planner. 
• The ready-made financial products are not much help. Build your own portfolio of investments. 
• Insurance coverage must be kept up-do-date to save you from the effects of unprecedented health issues and life threatening events. 

Last but not the least, tax benefits offered on tuition fees and education fees are there to give you some relief. 

Section 10(14): Children’s Education Allowance is available upto Rs. 100 per month per child upto a maximum of two children. Hostel expenditure is allowed upto Rs. 300 in a similar manner. 

Section 80C:A maximum deduction on payments made towards tuition fee can be claimed upto Rs. 1.5 lakh together with the deduction with respect to insurance, provident fund, pension etc. in a financial year up to a maximum of two children. The deduction is available to each of the parents subject to other conditions. The total amount of deduction under section 80C, 80CCC and 80CCD shall not exceed Rs. 1,50,000 for the individual parent. 

The world is full of uncertainties. Markets are volatile and inflation is on a rise. An individual has to plan for several financial goals in a lifetime. Buying a house and a car, starting a family, planning for children and retirement are usually the main goals for anybody. Each of these call for a different strategy while planning for them. Educating children to make their future ready is ofcourse a primary aim for many parents. But the journey to reach the aim should not be done in a haphazard manner. It needs constant efforts and adjustments, dedicated monetary contributions and providing for emergencies while taking care of other plans simultaneously. The article will be able to guide you on the factors that you should consider. Take decisions based on your own unique situation. However, the points discussed here are standard in nature and are applicable to all to a certain extent. 

Create the investment portfolio wisely as it is the major determinant of the whole plan. You should have the flexibility and readiness to amend the original plans.  Keep yourself updated about the changes taking place in the educational world, as the future of your children is dependent on those trends. 

Image from Unsplash.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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