Plan early to fund your child’s education

   Summer time is college admission season in India. So, it’s timely to think about  financial planning for college and related expenses.

    Whether you are preparing to fund your child’s college expenses that start as  early as next week, or are wondering about how you will fund your child’s  college education a few years from now, whether in India or abroad, the  following is a simple guide to how to go about financing your child’s education.


   To start with, recognise that it’s not just tuition fees that matter. There  might also be boarding and lodging fees, and there will definitely be  incidentals such as transport, daily expenses on food and snacks, and clothing  costs.

   You could either be faced with a crunch situation today where these expenses  need to be provided for immediately, or you have some time to plan for all of  the above expenses.


Education loans

    If you need funds immediately, taking an education loan might be your best  option. Any Indian national between the ages of 16 and 35, who has secured  admission to one of the eligible courses and institutions, can apply for an  educational loan.

    If you need funds for a full-time course, you will likely need a co-applicant,  who can be your parents, spouse, sibling or relatives. Your loan eligibility is  calculated on the basis of your co-applicant’s income. Part-time courses might  not require a co-applicant, but you can improve your loan eligibility by  including a co-applicant. Also, some banks might require a guarantor for the  loan. Lenders exercise some discretion regarding which courses and institutions are  eligible for loans. They take into consideration your earnings and income  potential after the course.



Check if course is eligible for a loan

    Your chosen course can be full-time or part-time, undergraduate or  post-graduate, degree or diploma, at a government or private institution within  India or abroad. You should check with your lender if your course is eligible  for a loan or not.


    If your course is in India, you can get a loan up to Rs 10 lakh. If the course  is abroad, you can get up to Rs 20 lakh. In both cases the loan is disbursed to  your chosen education institution directly.

    Lenders will usually expect you to fund 5-15% of the education cost, but in some  cases can offer you 100% of the entire cost of education. The interest rate  charged on these loans can range from 10% to 12%, and in most cases PSU banks  offer a better rate than private sector banks.



You might be expected to put up a collateral
   For loans above Rs 4 lakh, you might be expected to put up some tangible  security as collateral. Usually, you will get a period of one year from the  completion of the course or six months after being employed, whichever is  earlier, after which you are expected to start repaying your loan. The industry  standard is a repayment period of up to five to seven years.

    Stay way from taking a personal loan towards education purposes as personal  loans are typically more expensive. Additionally, education loans are eligible  for a tax deduction under Section 80E on the interest paid on loans taken for  higher education for yourself, your spouse and children.


   There is no limit on the amount of deduction you can claim. The only thing to  keep in mind is that the course for which the loan is taken should be a graduate  or post-graduate programme in engineering, medicine or management or a  post-graduate course in the pure or applied sciences. Please check with your  accountant for your eligibility.



Long-term funding

    If your need for funding education is not immediate but a few years away, you  must plan accordingly so that you can build a substantial pool of capital  towards funding your child’s education goal.

    Please recognise that whatever strategy you choose towards creating capital must  take into account that tuition fee inflation is running at between 10% and 15%  for most decent colleges/universities.

    Whichever of the following you choose, its best to start early so that you can  take advantage of compounding of capital to offset the impact of rising  education costs.



Child Ulips

    These are insurance policy cum investment plans. Under these plans, a parent can  buy a policy where the child is a beneficiary, but the parent is the life  assured, i.e., the person who’s life is being insured such that if anything  happens to this person the child will get some monetary compensation.

    Child Ulips should be bought for the long-term. Many parents buy such policies  when their kids are still 5-7 years, even though the college education date  might be a decade away.

    If something happens to you during the course of the policy, the insurance  company will continue to pay the premium towards the policy on your behalf, on  top of giving the survivors the sum assured under the policy. Additionally, when  your child is ready for college (or at a maturity date you pre-determine at the
time of taking the policy), the insurer will pay you a sum (the fund value) that  can be used towards funding the child’s education.


Stocks & MFs

    Long-term investing in the equity capital markets is a very practical way to  fund an education goal. Whether you buy stocks directly, or invest through a  systematic investment plan into equity mutual funds, both allow you to take  advantage of the superior returns that equities are expected to offer in the  long-term over other asset classes that the common investor can invest in.

   If your child will be ready to go to college in say a decade or more, then  putting aside some money towards equities or equity mutual funds is a smart way  of taking advantage of compounding of capital such that in a decade you have a  substantial pool of capital to fund your child’s college expenses.



Property


    If you have surplus funds today, you might also choose to buy a property for  investment purposes from which you can generate rental income.

    This rental income can be invested to build a corpus of funds to be used later  for education expenses. Alternatively, this rental income itself can be used to  pay college related costs.

    Whatever strategy you choose to employ, recognise that with a little bit of  planning you can help your child achieve the best possible outcome towards  his/her education. Our society places a great premium on top quality education.  Don’t compromise on kids’ education just because you didn’t have the foresight  to plan their education goals.