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Access to higher education is easier now, with good colleges in India and foreign universities wooing students. But, parents must plan and start saving early to build a corpus for their children's higher studies. And, while it is an important financial goal, such saving should not be prioritised over other goals like saving for retirement.
"There has to be a balance between funding short-term and long-term goals. When we speak of long-term goals, families should put retirement as the first priority and then children's education. For, if children's education is partly unfunded, there are several options like scholarships or educational loans. But, if your retirement is unfunded, no institution will come forward to fund it. So, parents should not put the child's education at the mercy of their own retirement planning," says Abhinav Gulecha, founder, Soham Financial Planners.
There has to be clarity on where, which course and for how long the child plans to study, says Deepali Sen of Srujan Financial Advisors. For example, a two-year architecture course in Australia might cost Rs 30 lakh as course fees and another Rs 20 lakh for living expenses, in today's terms. A three-year hospitality undergraduate course in Canada might cost Rs 25 lakh in course fees and another Rs 16 lakh in staying costs. Besides, all this will need to be adjusted for inflation, depending on the number of years after which the child will start the course.
Invest systematically; account for inflation
Ideally, families should stick to simple and low-cost financial products, and invest systematically. Most parents are either unclear about how much to set aside as a target or make the mistake of investing in money-back insurance plans, which provide sub-standard returns, says Sen.
"Some parents also invest in land or property, hoping to sell this when a need arises. However, immovable assets might be illiquid. At the time of need, these might not fetch the amount of money one hopes for. It is risky to depend solely on these," she says.
"The most important factors to consider are safety of the corpus and the rate of return on your investment. The returns should outperform the rate of increase in the cost of education," says Amit Kukreja, founder of WealthBeing Advisors.
For goals some time away, say 10 years or more, parents can look at the Public Provident Fund (PPF), Sukanya Samriddhi Scheme and direct plans of equity mutual funds (MFs), instead of the high-cost child plans offered by insurance companies. For goals five years away, look at short-term debt funds through the direct route or bank fixed deposits (FDs).
"Given that education inflation is much higher than consumer inflation, we assume an inflation of 12 per cent for children's education. This means there has to be some allocation to a high risk/return asset class like equity, as per the family's comfort level and risk appetite," says Gulecha.
When the need is within the next two years, opt for short-term products like a liquid-plus fund, short-term debt mutual fund or bank FD. If the need is between two to four years, one can look at investing up to 25 per cent in equities and the balance in fixed income instruments. If the time is between four to seven years, one can invest 25-50 per cent in equities, through a diversified MF and the balance in fixed income (debt MF). If the requirement is more than seven years, one can invest the majority of funds (in excess of 75 per cent) in equity through a well-diversified MF.
When to take an education loan
While the first choice should always be to fund children's education from your own source, if there is a shortfall in the corpus, one can look at an education loan. "The cost of these can be high, anywhere between 10.5 and 13.5 per cent," says Sen.
An education loan can help in two ways. One, the parent gets tax savings under standard deduction in the income tax (I-T) rules. Two, when the student starts to repay the loan, it will make him/her financially responsible, says Kukreja. However, the flip side is, if the family is not able to repay, it might hurt the credit score of the borrower, in case of a default.
Parents have to be careful in taking just the right amount of loan that the child can fund after getting employed. To that extent, family members need to balance their expectations on the choice of country or college while deciding the amount. In the case of a foreign country, include living costs, too, since that forms a good portion of the total education cost, says Gulecha.
"Educational loans offer tax benefit u/s 80E of the I-T Act but that alone should not be the reason for taking the loan. While one should avail of the tax benefit, if possible the loan should be prepaid or closed in full, rather than running it for the full period," he adds.
Conditions with education loan
In most cases, it is the parent who is the guarantor and the guarantor will need to pay off the loan in case of default. "This means the guarantor might need to have investments which can be attached for the purpose of taking a loan," says Sen.
In case the student is unable to repay the loan, he/she can request for either deferment (postpone repayments) or seek to rework the equated monthly instalment, thereby increasing the tenure. However, remember that if tax exemptions are to be availed, the loan period cannot go beyond eight years
"Normally, cancellation or deferment of the student loan may be entertained under extreme conditions like death of the borrower, permanent or temporary disability, unemployment, economic hardship, etc," says Sen.
RBI RULES FOR FUNDING FOREIGN EDUCATION
For studies abroad, the estimate received from the institution abroad or $100,000 per academic year, whichever is higher, may be availed. Students going abroad for studies are treated as Non-Resident Indians (NRIs) and are eligible for all the facilities available to NRIs under the Foreign Exchange Management Act, 1999. Educational and other loans availed of by students as residents in India can be allowed to continue.
A student holding an NRO (non-resident ordinary savings) account may withdraw and repatriate up to $1 million per financial year from his NRO account. The student may avail of an amount of $10,000 or its equivalent for incidental expenses, of which $3,000 or its equivalent may be carried in the form of foreign currency while going for study abroad.
