Besides ULIPs and mutual funds, PPF and gold, another option that parents can consider when trying to raise funds for their child's education is loans.
You need to be aware of the various aspects of an education loan when doing this. However, in your anxiety, make sure that you don't ignore the not-so-pleasant aspects.
Here are the important facts that parents should consider:
What will happen if your child fails in any semester or year of his course?
Some banks have a condition that in case the child fails in a particular semester or year, the complete loan must be repaid immediately.
What if the child fails to secure a job after completion of the course?
Competition is fierce in most professions -- not every individual can land that dream job. If your child does clinch one, initial pay packages may not be very lucrative, since numerous factors affect the offers.
Will the course / qualification stay in demand over a period of time, and provide good earnings for your child?
Some professions spawn great demand, and people rush to get qualified in those areas. But many times, the trend for that profession turns out to be temporary, with the result that by the time a student qualifies and is ready to start a career, the demand has stagnated or dropped.
One must look at both, the current earning levels and the long-term potential of a stream before opting for it.
In the event that the child is unable to pay, will parents be able to pay off the loan instalments on his behalf?
Parents are typically in the age bracket of 45-55, when repayment starts. As such, they are approaching retirement, and not many are blessed with good pension schemes to fall back on.
In the event that both child and parents are unable to pay, can the assets that have been given as security, be securitised for recovery of debt by the bank?
Yes, even if it is the house that they live in.
It can even be their lifetime saving of deposits saved for retirement.
What if the demand for professionals, in area that their child specialised in, drops?
It definitely can happen. A typical example -- many parents faced problems when the recent global technology slowdown led to huge job cuts.
In such a situation, it becomes extremely difficult to secure a new job or to sustain the current job.
Inflation keeps rising and the cost of living goes higher, but income levels deplete or just stay constant.
If parents choose to lengthen the term by keeping the EMI constant, it can even stretch beyond their retirement years, making repayment difficult, should the child default on payments.
The following table illustrates how much your child will be able to repay on basis of the earning potential of the jobs available for him in future.
|
Floating Rate 12.75% | ||||
|
Loan Amount |
Repayment Tenure | |||
|
EMI for 5 Years |
Interest Paid |
EMI for 10 Years |
Interest Paid | |
|
250,000 |
5,656 |
89,380 |
3,696 |
193,520 |
|
500,000 |
11,313 |
178,759 |
7,392 |
387,039 |
|
750,000 |
16,969 |
268,139 |
11,088 |
580,559 |
|
1,000,000 |
22,625 |
357,518 |
14,784 |
774,080 |
|
1,500,000 |
33,938 |
536,280 |
22,176 |
1,161,120 |
|
2,000,000 |
45,250 |
715,036 |
29,568 |
1,548,160 |
|
Floating Rate 14% | ||||
|
Loan Amount |
Repayment Tenure | |||
|
EMI for 5 Years |
Interest Paid |
EMI for 10 Years |
Interest Paid | |
|
250,000 |
5,817 |
99,024 |
3,882 |
215,799 |
|
500,000 |
11,634 |
198,048 |
7,763 |
431,598 |
|
750,000 |
17,451 |
268,139 |
11,645 |
647,398 |
|
1,000,000 |
23,268 |
396,098 |
15,527 |
863,192 |
|
1,500,000 |
34,902 |
594,144 |
23,290 |
1,294,800 |
|
2,000,000 |
46,537 |
792,190 |
31,053 |
1,726,396 |
Loans are a good option, if you are fairly sure of future inflows; else it works as a deadly debt trap. It is a vicious circle that goes on and on. There has to be a certain plan followed by equally strong action and commitment from the child.
The values that you instil in your child are what matter over a period of time. It is too never late to start saving for your child's education. But bear in mind that a loan should always be your last option.
The author is a wealth management specialist with an MNC bank in Dubai. He can be contacted at parikhjiten@gmail.com.
