Higher education in India, especially professional courses, is becoming expensive by the day. The good old days of government support is practically over.
With minimal government funding, institutes have been forced to increase their fees. And if a child has to go abroad to study, there will be additional expenses like traveling, lodging and boarding, apart from high fees.
Besides, with inflation, the cost of education will only increase further. For example, assuming 6 per cent inflation, 10 years later, the fees at Indian Institutes of Management may be around Rs 350,000 - 450,000, up from about Rs 200,000 - 250,000 today.
Therefore, while earlier a single income was more than sufficient, today even with two incomes we may not be able to finance our children's higher studies. Hence, it is important to plan for your children's education well in advance.
Here are some available options:
Scholarships
Since government support has been reduced suddenly, there has been a sharp jump in fees in the last the few years. Therefore, many of those who didn't save much money earlier are caught on the wrong foot. For them, trying for a scholarship can be one option.
Mostly educational institutes have programmes for awarding scholarships to the needy and deserving students. Many philanthropists and alumni also donate money to help such students.
Therefore, lack of money need not always be a constraint for a truly deserving student. One can, therefore, check with the institutes about such scholarships. If you find that you meet the eligibility criteria, you can apply for such scholarships. If approved, such money will substantially ease your financial requirement.
Education loan
Loans from banks are fast becoming a preferred way of financing higher education, in case scholarship is not available. The banks have become more market-oriented, making it convenient to avail such loans. Also the interest rates and repayment terms are quite feasible and attractive.
Further, the Government has extended tax benefits, which reduces the effective cost of such loans. Depending on one's particular situation, the education loans can be availed either by the students or their parents.
Insurance
Insurance companies offer policies like money back or endowment, which give a defined payout at a defined period. Herein, one keeps paying a premium every year and gets a lump sum amount when the child has grown-up and is ready for college. Such policies can be used to plan for the higher studies, if you have time on your side.
Besides, if something unfortunate happens to the parent, not only does the child still get the sum assured on maturity, but the interim premiums are also waived off.
However, the return from such policies is relatively quite low, barely covering the inflation. So it is possible that you may end-up with some shortfall in case the education expenses move higher than the average inflation levels.
Investment
Given certain inherent disadvantages of an insurance policy, it may be better to invest one's money in pure investment options such as provident fund, national savings certificate, and mutual funds.
These will, in most cases, give better returns than insurance policies. Of course, to cover the life risk, one can take a term policy. Thus you enjoy both the benefits - risk cover and better returns.
Debt products like PPF are great investment options. For a longer period one can also consider investing some portion in equity, and accumulate a higher corpus. Though risky in short term, equity tends to give good returns over long periods with relatively higher probability.
There are many 'child' oriented investment products (and insurance policies too) available in the market today. They may not always be a good investment option. In fact, there is no need to specifically go for child-oriented products. Even normal investment products like PPF, MFs etc., which suit your profile, can serve the purpose; many times in a much better manner.
It is, however better to start early. If you want Rs 350,000 to 400,000 10 years hence, you can easily and safely accumulate this money if you start saving about Rs 25, 000-28,000 every year in PPF. But, if you start after five years, you would need to save about Rs 61, 000-68,000 per year. This means higher burden on monthly budgets.
And if you have to save for two kids, your investment just doubles. All this may sound daunting. However, there is no need to panic.
You would most likely be still in an earning phase when your child is ready to go to college (and getting much higher salaries), which can supplement your savings. Besides, these options are not mutually exclusive. You can always fill the gap in your savings with a small loan and/or a scholarship.
The author is an investment advisorFor more on financial planning, click here
