How To Do “Stress-free” Child Education Planning

Providing a high quality education for our children has always been an important aspirational goal for any parent – and for all the right reasons. Studies suggest that the quality of education received will impact your child’s earnings by 30-50%! Over the course of one’s lifetime, that’s several lacs of Rupees.

To make matters worse, education expenses have been inflating at a higher than average rate in India. With costs escalating at 9-12% per annum, education expenses are bound to be frightfully expensive a decade down the line.

Are Student Loans a Wise Option?
Student Loans tend to be costly. In spite of moratorium periods, a debt ridden career start is never a wise idea and may drive your child to make short term career choices. A thumb rule is that your child (or you) will have to pay back one a half times the loan amount over the course of the payment period- the EMI ranging between 20,000 and 25,000 per month for a 10 Lac loan. Not having anything left over in exchange for the intense career-establishing toil can leave your child feeling burned out. To complicate matters further, there’s no predicting how the job market will be when your child graduates.

Start Planning Early
The best way to counter the effects of inflation is to start planning early. We have some discerning clients who actually start planning for the children’s education even before they are born! Starting early will allow you to benefit from compounding and save in a stress-free manner, greatly reducing your “out of pocket” outgo in the long run.

Don’t Blindly Opt for Insurance Plans
Life insurance has its merits when it comes to education planning, especially when it comes to ensuring that the goal is fulfilled even in case of the unfortunate death of the breadwinner. However, they are likely to come up short when it comes to growing your money. Rather than blindly purchasing child insurance plans, wisely evaluate all options to create a balance between goal protection and growth.

Break It Up Into Three Buckets
For stress-free planning, break up your children’s education goal into three buckets – short term, medium term, and long term.

The Short Term bucket is the one that needs to be financed starting today, going up to 5 years from today. Obviously, this is the immediate priority. Rather than saving aggressively for this bucket, you’ll be better off provisioning for it from your monthly cash inflows (say, Rs. 10000 per month), while simultaneously planning for the medium and long term buckets.

The Medium Term bucket is an ‘education fund’ that will be used up between 6 to 12 years from today (for a 5 year old child, this would be class 6th to 12th or thereabouts). You should aim to save aggressively for creating this fund. Monthly SIP’s in large cap mutual funds would be ideal. Here’s a ballpark – a monthly SIP of Rs. 11,755 should suffice for creating a 12.3 Lac fund in 6 years, which should be enough to fund your child’s tuition fees from class 6 to class 12.

The Long Term bucket is the trickiest one. By now, costs would have inflated dramatically due to the compound effect of inflation. However, you’ve got time on your side – so any surplus left over after planning for the medium term bucket should be deployed aggressively into higher risk, higher return instruments that have the potential for delivering long term growth. Even a monthly saving of Rs. 13,000 can help you create a 57 Lac corpus in 12 years if it grows at 14% per annum!

A qualified financial planner can help you plan and structure these three buckets in more detail.

Discipline is the Key
By splitting this important goal into three buckets as above, you’ll be taking away a lot of stress from planning for it. Make sure you continue saving in a disciplined way – even if you have to pause the monthly saving for a while, do not liquidate the fund midway to finance other needs. Your future self (and your children) will thank you when the critical time for them to enter the job market approaches - and you’re both loan free and stress free!