Educating Your Kids Is No Child’s Play

From nursery to college, you need over Rs 21 lakh to just sponsor your child's education in the metros. This requires proper investment planning.

"It's a girl," says the nurse to the couple. The couple has been waiting for this moment for long and is elated! Be it a boy or a girl, all parents want to give the best to their child. The addition of a member to the family brings joy and cheer to everyone, but there are additional responsibilities too. One of them is giving the best education to your child, which requires a lot of money. From playschools to post-graduation, education costs are rising. Our estimates indicate that on an average, it can cost you Rs 21 lakh (at today's prices) to educate a single child from school to college. This includes expenditure on school fees, coaching classes, books, stationery and so on. If you have to include post-graduation studies as well (MBA, for instance), the cost may go up to Rs 98 lakh.

How long is the child dependent on you?

Before drawing up a financial plan, you have to know how long the child will be dependent on you? Hence, you have to start planning for your child from around six months before the baby is born to his/her estimated age of marriage. In some cases, it could be till the child continues to study.
Ideally, parents should have a buffer to take care of over-runs and contingencies. For example, Nitin Vijan's budget for his daughter, Vedika's, education looks like this: Rs 55,000 a year up to Vedika's junior college; Rs 3 lakh for her fouryear engineering course and Rs 20 lakh if she plans to pursue her masters in science or an MBA.

Expenditure graph

Estimates show that the expenses are higher (not necessarily on education) when the child is in the age bracket of 1-5 years. Subsequently, costs tend to lower once the child reaches the age of five years. Again, the expenditure mounts when the child touches 15 years of age. Parents spend in the range of several thousands up to a lakh just on coaching classes and tuition.
Says chartered wealth manager and certified financial planner Kartik Jhaveri, "Parents want to give the best to their child to prepare him/her for the board exams so that s/he can come out with flying colours. They do the same, but on an even larger scale for the 12th standard. In this case, it's more crucial if the parent plans to sponsor the child's professional course."

Graduating from college

Here, the expenses depend upon what course the child plans to pursue. Professional degrees such as engineering or medical are more expensive than regular graduation courses. Here too, there is another variant. If the child is studying in India, expenses may be under control. But if the child plans to pursue his/her education abroad, expenses can go through the roof. Finance options are available to fund overseas education.

Start early

It pays to start planning early to sponsor the education of your child. You can start with a monthly saving of Rs 8,000-10,000 which can go to your child's kitty. You should work towards a corpus of Rs 10 lakh and upwards. A Rs 10-lakh corpus will just take care of your child if s/he plans to do regular graduation. You have to keep aside this money and keep withdrawing from the returns generated from this capital.

Child plans may not be the best investments

Don't get tricked by an insurance broker who says high premiums (of a child plan) will fetch you the best returns for your child. You have to read the fine print to see if it's worth the money. In reality, it may be a high-cost product, yielding peanut returns, Mr Jhaveri adds.

Stick to simple investments

Diversified equity funds can do the needful. One of the advantages of these funds is that they give you the flexibility to withdraw whenever you want. Moreover, they're not time-bound, nor do they have a predefined investment where the money can't be touched till your child turns 18, says another wealth advisor under conditions of anonymity. You can exit from the investment if you feel you've made a wrong investment decision. Also, the returns are largely tax-free.

While Planning For Educational Expenses, Tackle Emergencies

While planning for educational expenses, make sure you set aside some amount to tackle emergencies. Here we highlight the need for a contingency fund.

With education expenses increasing over the years, a lot of advance planning is required to ensure that adequate sums of money are available to complete one’s course when required. Most people consider the funds that are required for fees and other expenses over the time period of the course and then provide for such funds. However, one must also set aside an additional sum to tackle any emergencies that may arise. Such emergency costs cannot be planned for. But care should be taken to ensure that a large part of the total expenses is not classified as emergency costs because this reflects poor planning.

As regards the basic expenses, fees have to be paid at the beginning of each financial year or as specified by the institution. Also, books have to be bought during a certain time period. Since these expenses are spaced out over various time periods, they reduce the burden on the individual. However, such a luxury is not possible in the case of a contingency fund. There is no surety as to when the need for such a fund may arise and hence, the fund has to be ready for use from the day of start of the education.

Once such a contingency fund has been created, one needs to decide the amount that has to be kept in it. If only a small amount is set aside in this fund, one may have to run around at the last minute for additional funds. This was the case recently when students appearing for their CFA exam had to bear the cost of flying to a neighboring country, as well as acquiring a visa, in order to sit for their exam.

While the amount set aside in the contingency fund should not be too small, it should not be too large either, as this will result in a huge sum being locked-in. There are no rules for this, but one way is to consider the contingency amount as a certain percentage of the actual cost of the educational course. This may be 5% or 7% or even 10% of the total fees; the figure depends upon one’s judgment of the expenses that may crop up.

Once the amount is fixed, one should ensure that this figure is invested in the right manner so that it can be used when required. Keeping this amount in a savings account is not a good idea because it will not earn much return. At the same time, this amount has to be invested in a place from where it can be withdrawn quickly if required.

Hence, two options are available for an investor. The first option is a simple fixed deposit with a bank where there is no lock-in. The other option is any liquid scheme of a mutual fund. Here, the growth option that generates capital gains is a better route, even though this results in a slightly larger tax impact. The higher tax blow is not a deterrent because the main reason for investing the money here is not to earn higher returns, but to earn some return while the money is lying around, waiting to be used in case of an emergency.

Now, Parents May Be Able to Claim Tax Benefits on Higher Education Loans for Children

The Union Budget 2007-08 has brought some good news for students pursuing higher education and for their parents. If the proposals stated in the Budget do fructify, it will be possible for a taxpayer to claim deduction on account of interest on education loan taken for one’s children or spouse.

The memorandum to the Budget specifies that: “It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of his relative also. It is also proposed to define the term ‘relative’ for the purpose of Section 80E so as to mean spouse and children of the individual.”

This amendment holds important implications. Currently, only an individual who has taken loan for pursuing his/her higher education is eligible for tax benefits. The relief is not allowed to parents, but to the student himself/herself when he/she starts repaying the amount.

Now, it has been proposed that the tax benefits can be availed of even by ‘relatives’. With this, parents/spouse can take a loan for their children’s/spouse’s higher education and claim tax relief on repayment of interest. This amendment will apply in relation to the assessment year ’08-09 and subsequent years.

This will be a major advantage for parents of children pursuing higher studies. They will be able to lower their overall tax liability by claiming deduction on account of interest paid on the education loan. For students, this means that some part of the liability on account of the loan will have been paid off by the time they start their career. However, industry players are yet to read the fine print and decide how to put the revised education loan scheme into practice.

Says a senior manager with a public sector bank. “At present, the loans are disbursed in the student’s name. But with the possible amendment, we have to see if the bank can sanction a loan in the parent’s name so that they can seek tax relief.”

The amendment also raises a few questions. One will be able to say something definitively only once the details are disclosed by the tax authorities and by banks giving out education loans.

Here, we attempt to answer, with whatever information is currently available, a couple of basic questions that could crop up in a few cases.

Is it better to take an education loan than finance it from one’s own pocket? Bankers say that demand for education loans has picked up, as the cost of higher education has surged by 20-50% in the past few years. Now, with the proposed amendment, bankers see a further rise in the demand for education loans.

Industry players say that many institutes demand a huge portion of the fees as an upfront payment. This could drain the savings and disturb personal finances of parents. An education loan is more attractive now as even parents will be able to seek a tax relief on the same.

Should the parent take the loan? “In the current situation, the bank always disburses a study loan in the name of the student who has signed up for a course. A parent can only sign as a guarantor for the loan,” says a senior manager with Andhra Bank.

However, banking sources also say that soon, a time may come when the bank will sanction loans in the parents’ name. In such cases, there are two ways in which a study loan can be repaid.

One option is that the parents can service the interest component of the loan during the study period of the student. In this option, both the parents and the student stand to gain. Parents can seek tax relief to the extent of the interest outgo and the burden of repayment reduces considerably on the student.

The second option is to start repaying the loan once the student takes up a job. In this case, the student repays the loan.

However, these deductions are available up to a period of eight years. Please note that you cannot claim any tax deduction if your employer gives you an education loan. This also applies for family or friends. You have to borrow from a bank or financial institution or approved charitable institution to claim tax benefits.