3-Step Plan to Fund Your Child's Education

This article talks about how parents can successfully plan their funds in advance for their child's education. What are the necessary steps to be taken to achieve those goals and what are the different funding options to fund for your child's education..

The cost of education has seen a phenomenal rise so much so that the education market today is worth approximately Rs. 70,8000 Crores. Higher education takes 60% of the market share and schooling education takes the rest 40%.

The rate at which the cost of education is rising, it is inevitable that by 2025, the cost of an MBA degree will be Rs. 50-60 Lakh and an engineering degree will be Rs. 25-30 Lakh while the cost of schooling will double.

The stats are frightening as they bring out the sad reality for most parents, who want to give good education to their children but cannot afford it.

In this article, we'll talk about how parents can plan ahead and successfully prepare to fund their child's education.

1. Setting the goal right

Most parents are aware that they need to create a corpus for their child's education. But, they don't realize how much is enough. Estimating the child's education cost can be difficult for 2 reasons – It is a long term goal, and you are not sure which course your child will opt for. So, your planning is based on assumptions.

Let's understand what factors you need to consider to estimate your child's education cost.
  • Let's assume that you are saving to send your child to pursue an engineering degree. The current cost is Rs. 10 Lakh. Apply inflation to it and also factor in the fact that most Indian premier institutes escalate their fees at 10 percent CAGR.
  • If the current cost of a postgraduate degree in management at IIM is approximately Rs. 23 Lakh, 14 years from now, if your child decides to pursue this post-graduate programme, you should be prepared to pay around Rs 87.37 Lakh.
  • If you expect your child to go overseas, you'll need to consider education inflation in that country and also the currency impact.
  • Don't forget to add lifestyle costs. If your child is planning to go abroad for further studies or plan to pursue a degree in another city, then the cost of education should also include travel costs, hostel expenses, etc.

Now that you know the approximate cost of your child's education, your next step is to check where you stand financially.

2. Take stock of your finances

Since you will need to build a considerable corpus for your child's education, it's advisable to start planning for it as early as possible.

Take stock of your current financial situation. How much money can you keep aside as savings for your child's education? Can you invest in long-term financial schemes such as equity, mutual funds, fixed deposits, and ULIPs? Depending on your financial situation, look for funding options.

3. Look for funding options

For most people, there are 4 basic routes to pay for their child's education:

a. Save money

Building an education corpus is challenging and has to be done with definitive goals in mind. You'll need to identify major spend areas like admission fees, tuition fees, cost of books, stationeries, transportation, etc.

To assign a ballpark figure to these expenses seem daunting, but it is important to have an estimate so that you can decide on the amount to be put away every month.

b. Apply for financial aid and win scholarship funding

Some educational programs award scholarships/financial aid based on merit or need. The key is exploring this option as early as possible.

Check with the schools/colleges/institutes and research online for external agencies and trusts that provide scholarship or financial aid options.

Submit your application to unlock these opportunities. Your child may have to go through eligibility tests, but if you are confident about your child's potential, it's definitely worth a try.

c. Take loans

If your savings aren't enough and if you fail to get financial aid/scholarships, banks or financial institution is the next place to go.

  • Education loan: You can get your child's education financed through an education loan. Look for an education loan that covers a maximum of your education expenses. You'll get an education loan in India of up to Rs. 20 Lakh at an average interest rate of 12-14 percent per annum.

  • Personal loan: This funding option will help you finance the admission, tuition fees and other expenses such as visa, travel, accommodation and lifestyle needs. Moreover, you can get a loan without pledging any collateral or asset. However, make sure that you research and compare the personal loan interest rates before signing the dotted line.

  • Personal line of credit for education expenses: Even if your child's education and expenses are covered through an education loan or a personal loan, it is advisable to have ready access to credit whenever and wherever required. A personal line of credit does just that. It is available to you 24/7 in case of emergencies, educational or otherwise. It is good to carry a line of credit, especially if your child is studying abroad or in a different city.

d. Consider investment plans

Before investing in mutual funds, SIP and insurance, you need to identify your goal, the fund required and the time frame of investment.

It is advisable that you move your investments away from high-risk products. Play it safe by investing in financial products that are less prone to lose in a volatile market.

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Author: Gouranga Kumar Basistha17 May 2019 Member Level: Gold   Points : 3

Excellent article with practically all the bases covered. This topic has indeed become important in the current context. High fees have become a cause of concern from school level onwards. The problem only gets bigger if we don't have our finances in order. I still believe that before going for loans, we have to fully explore the zero-liability options, just to be on the safer side.

Probable error: "...by 2015, the cost of an MBA degree will be Rs. 50-60 Lakh and an engineering degree ...". The author must have intended the year 2025.

Author: Umesh20 May 2019 Member Level: Platinum   Points : 5

It is a fearful fact that education is becoming costlier day by day. The parent's plight can be well understood in this scenario. This article has brought out the various avenues of resource planning for the education of the children and the concerned parents can take advantage of this information which has been presented in a lucid and confined manner by the author. Before deciding to go for a particular loan amount the parents must see their repaying capacity also and should not fall in the trap of high loan amounts making their financial conditions miserable. One should take only the amount of loan which he can comfortably repay back without affecting the regular monthly expenses. If the student is meritorious and hard working he can do well in life even after taking education from the less costly educational institutions. One should not go for educational loans blindly because some other persons in the society are going for them.

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