Should you take a loan, sell assets, or start investing early? Here’s how to navigate the financial maze of higher education smartly.
The ₹1 crore question
You must start planning as soon as your child is born. Take a typical graduation in a premier IIT and then a post-graduation at ISB. The 4-year IIT course would cost you around ₹30 lakh, including boarding and lodging.
In addition, the ISB-PG will cost you another ₹55-60 lakh. Effectively, you are looking at around ₹1 crore of which ₹30 lakh will be needed when your child reaches 17 and another ₹60 lakh when your child reaches 21.
If you start when your daughter is 2 years of age, you have sufficient leeway to reach your goals.
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For the IIT goal, you need an equity fund SIP of just ₹5,350 for 15 years, with compounded annual growth rate (CAGR) of 14%. Of the ₹30 lakh you get at the end of 15 years, you contribute just one-third and the rest comes from the SIP (systematic investment plan).
For the ISB-PG course, you need ₹60 lakh when your daughter turns 21, which is 19 years away. At 14% returns over 19 years, you need a monthly SIP of ₹5,900 to reach ₹60 lakh. Here, you contribute less than one-fourth the corpus and the rest come from the SIP.
So, starting early with a total SIP allocation of ₹11,250, spread across two SIPs takes total care. Note, the above examples don’t factor in the how the costs might change in future due to inflationary impact.
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That is not how it works in practice
The sad part is that for most families, that is not the way it works in practice.
In reality, many families find themselves scrambling for funds only after receiving the admission letter, often resorting to an education loan. There are three main ways to manage this financial burden.
First, the student can take the loan in their own name, with EMIs beginning after course completion. Second, the parent can take the loan instead, which not only eases the financial pressure on the child but also provides tax benefits. Lastly, families can leverage existing assets to cover costs, as long as it doesn’t compromise other critical financial goals.
Asking the student to take the education loan
This is something that a lot of families do, since it is much easier for the student to get the loan.
Here there are some basic steps to keep in mind. Firstly, most universities offer merit scholarships. There are also other aid societies. Exhaust all these options and only take the balance amount as loan. That will reduce the pressure on the student.
Also read: Is mandatory class attendance really necessary for higher education?
Also, taking the loan in the name of the student means, the parent or any other earning member with stable income will have to be a co-applicant. In this case, the repayment starts after the course is over, but the burden can vary depending on the condition of the job market.
Parent taking education loan for the child
This is a recommended method. Here is how you can do it.
For a 4-year IIT course costing ₹30 lakh, a ₹25 lakh loan taken for 8 years (the maximum period for Section 80E tax benefits) at a 9% interest rate results in a monthly EMI of ₹36,626—an amount you may find manageable.
During the 4 years of study, the total interest paid amounts to ₹7.2 lakh. With a 31.2% tax shield (assuming a higher tax bracket), you effectively save ₹2.25 lakh.
Reinvesting this tax benefit in an SIP of ₹4,700 per month for 4 years at an assumed 14% return can generate a corpus of ₹2.98 lakh. This sum can be used to reduce the loan principal, shorten the tenure, or lower the EMI, making repayment in the remaining 4 years significantly easier.
Selling family assets to fund the education
Is this really a good move? As long as the assets do not impinge on your long-term goals like retirement or planning for the other children, it is fine.
For instance, if you have an additional portfolio of direct equities, you can leverage that to pay for the education.
The reality is that education is an investment that will yield rich dividends in the long run. Don’t hesitate to use family assets, as long as it does not impinge on other financial goals.
Also read: India’s education system must adapt better to the real world out there
Nehal Mota is co-founder and CEO of Finnovate.
