How to plan for education expenses

How to plan for education expenses





I the Bollywood flick “Three Idiots“, the lead protagonist (Aamir Khan) talks about the education system in India and the pressure a child has from the parents and the ecosystem in which heshe lives.Right from birth, parents want their child to become a doctor, or a pilot, a police officer, an engineer, etc. No wonder this is the most important financial goal in almost every parent's life in India. So much so Raj Malhotra (Amitabh Bachhan) had to withdraw his entire PF money to support his son's higher education in another Hindi movie, “Baghban“ . As a caring parent you would always want your child to get the very best, especially education. When we meet most of the to-be parents or just havebeen parents, the top priority we find is to plan for the child's education. According to a 2011 ET Wealth study , a middle class family spends around Rs 54.75 lakh to raise a kid from cradle to college in a metro city , excluding higher education costs.
When Gaurav Mody and Urvi (names changed) visited us to plan for their one-month-old daughter Dia's education requirement, they were shocked to see the cost of education in today's terms as compared to what they have incurred for themselves. Today , the cost of education for the child starts right from the pre-nursery school and the inflation in education sector is more than 10% annually for the kind of school most parents want to send their kids too.We discussed the cost of Dia's education right from primary to higher education.
We have considered a diversified equity mutual fund for this purpose and an average return of 12% compounded annually . We also assumed that they need to withdraw every year the required amount to fund the respective fees for the year. The table suggests that we need to keep aside Rs 15,000 per month for the next 24 months, which is a total of Rs 43.2 lakh to fund the education goal Based on the table, it is clear that the total cost of education is a whopping Rs 1.6 crore in future value and the idea is to start a regular monthly investment right from today till Dia finishes post-graduation.





Start Saving For Child's Education Early





Not just higher studies & professional courses, schooling costs are rising rapidly too

There was a time when parents hardly planned in advance about how to meet the costs of their children's education, but saved some money for their wedding.Now, thanks mainly to the rising costs of education and competition, parents plan for their children's education. Till a few years ago, parents thought about meeting the costs of higher education. A new trend is emerging now. Financial planners advise new parents to start accumulating funds for meeting their children's education right from their primary school years (see case study by Gajendra Kothari).
According to Nikhil Kothari, director & chief financial planner, Etica Wealth Management, even at the primary level the cost of education is much higher than what it was just a few years ago, and so for parents it always helps to plan early and lessen the financial burden.
For example, a doctor in Navi Mumbai recently found that the entire cost that his father had to undertake for his five years of medical school is almost the same what he and his wife were paying for their five-year old child's one year of education at a good school in their neighbourhood. This is because the rate of inflation for educational costs is much higher than the consumer inflation rate that the government publishes every month, financial planners and advisers say. Compared to an average CPI rate of 7.6% per annum for the last 10 years, cost of education in India has increased by at least 10% per annum during the comparable period, they estimate. The holds true for wedding costs. With lifestyle factors and the need to show off prevalent even more in today's India, the cost escalation of weddings is probably even higher, they say.
So the question is how parents should approach to meet these costs.According to Kothari, they should start saving as early as possible, preferably soon after the child is born. “If you start early, per month you can save less and still meet your target corpus. In comparison more the delay, less bandwidth you have to meet the expenses for your child's education and wedding,“ Kothari said. Depending upon your future requirement and present income, either you yourself can set a target corpus and invest accordingly or seek professional help for a fee.
After you have set the target and put in the investments, the second important thing is to cover yourself adequately . “When you are planning for your child's education and marriage, usually the time horizon is 1520 years or more during which your life's risks would go up. So you should take sufficient cover so that in case anything happens to you, your child will at least be financially secured for his education,“ Kothari said.
The third important thing to include while putting in place a financial plan for child's education and wedding is to have a health cover for the family as a whole. “You should include the child in the health cover because during the initial years the child is more vulnerable to health issues,“ Kothari said.
Financial planners and advisers say that given the long tenure for which parents are required to save for these two purposes, it is advisable to use the systematic investment plan (SIP) route in equity mutual funds. “You are taking a view for 15,20,25 years. It's better to be in equities. Start when your child is born and keep a discipline,“ Kothari said. “Remember that even a delay by a few years can set you back substantially,“ he said.
On the issue of planning for the child's wedding, financial planners say that with families becoming more and more nuclear compared to the joint family structure earlier that took care of part of such expenses, parents need to think more seriously about that too. However, on the positive side, they also pointed out that with young people becoming more independent, increasingly they themselves are deciding on their own wedding and so this is coming out of the domain of the parents.