How can SIP help parents save for their child’s college education? – Forbes Advisor INDIA
Planning for your child’s future education begins with intention and a thorough understanding of the funding solutions available. Here’s why you should plan for your child’s education early and the avenues available to fund that long-term goal.
Why should you save for your child’s education?
Over the past 30 years, the cost of education has increased exponentially in India. In the early 1990s, a middle-class Indian family living in a metropolitan city had to pay between 400 and 500 INR per month for their child’s primary education. Fast forward to 2021, this amount can range from 4,000 to 15,000 INR per month.
A report from the National Sample Survey Office (NSSO) said the annual cost of education in 2014 increased 2.75 times over 2008, while per capita income increased only 2.49 times. .
The report tells us that the cost of education outweighed the earning capacity of the average individual. This trend was also visible in villages where the cost of primary education increased from INR 826 to INR 2811 during the same period.
These statistics are also true for post-secondary and higher education institutions in India which have experienced a 10-12% annual increase in tuition fees over the past decade. An engineering degree, for example, can cost up to 4 lakhs per year at some universities.
With the decentralization of schools, the demand for top teachers and the adoption of new technologies in the classroom, educational institutions can justify these fee increases.
As a parent, it is important to know that if your child wants to continue their education at a reputable international university which costs INR 1 cr today, that amount will increase much more over the next 15 years.
An additional but often overlooked expense that Indian parents incur when sending their child abroad for their studies is the exchange rate. If we are considering paying your child’s tuition fees abroad from an exchange rate perspective, rupee owners will be at a disadvantage.
Over the past 15 years, India’s current account balance, relative interest rates and inflation rates have caused the rupee to weaken. Why is this so important? The depreciated value of the rupee can cost parents more over the overall education of their children in the long run.
What Should a Parent Do Amidst Rising Costs?
At first, it may seem daunting to find a solution to meet the financial expenses of your child’s education. No parent wants their child’s dreams to fade. With good planning, they wouldn’t have to.
Start early: Parents should choose a financial strategy dedicated to their child and instill in them the habit of saving for their higher education from an early age. Every parent’s situation is different, so there is no “perfect” or “magic” age to start with. The ideal age to start is when your child is an infant or has not yet been born. The sooner you start, the better.
Be disciplined: Equally important is that a parent be disciplined when making regular contributions to their child’s education fund. With the right weather, the right savings, and some discipline, the costs will seem a lot less scary.
Where should a parent start saving?
For long-term investments relating to higher education, systematic investment plans (SIPs) in mutual funds would be the ideal choice. A SIP is a recurring monthly investment in a mutual fund that is automatically debited from your bank account. SIPs help investors gain exposure to the stock markets while reducing risk because they invest monthly.
One of the benefits of investing in the mutual fund markets is compounding – a process in which your interest is reinvested to generate additional earnings. If you start investing when your child is young, 10 to 15 years can help you generate significant returns.
A SIP of 15,000 INR per month for 15 years can help you save 1 crore INR, as detailed in the table below:
This amount increases as you increase your monthly contribution. This is entirely possible because your income, whether it is from a salary or from a business, is likely to increase as you, as a parent, advance in your career.
Are mutual funds safe?
Mutual funds are transparent products. Information sheets will be provided to you when disclosures are made to help you assess the product offering. A mutual fund fact sheet is your guide in valuing a fund.
The information on the sheet will include the fund objective, name of the fund manager, date of inception, benchmark and corpus size. It will also highlight the fund’s strategy, its sector diversification and its most weighted positions.
In addition, they will also mention the past performance of the company and the key indicators to measure risk. This will give you an idea in terms of performance expectations as well as the risk profile of the fund.
Mutual funds are relatively inexpensive financial products with low management fees ranging from 0.5% to 1.25% and are managed by trained financial professionals who aim to generate above-market returns. . They will also give you regular updates and you can get out of your investment if the fund does not keep its promises.
To gain exposure to mutual funds, investors can use cutting-edge technology platforms that give them advice on how to choose the funds best suited to their goals and risk appetite. Investors who are more financially literate can invest directly in mutual funds.
What if I cannot save the required amount?
You may not always be able to hit the mark with a mutual fund plan. In cases where you find that there is a deviation from the amount you are trying to save, you may need a back-up plan.
For example, you could save for a university that costs INR 1.01 cr, but by the time your child is ready for college, they might want to attend a university that costs INR 1.21 cr. How do you make up for a gap of INR 20 lakh? In this scenario, you can use an education loan.
Following the development of a child’s dreams is not always easy. They can change their minds and go from being a teacher, an astronaut or a scientist to that of a physiologist. As parents, it’s important to level up and track your financial investments to make sure your child achieves their aspirations.
Just like your child’s opportunities, your financial plan should be diversified. As a financial strategy, you should try to cover most of the education costs with your equity (equity – accumulated through SIP) and bring in the filler amount through loans.
Let’s see what a student loan is, its advantages and why to benefit from it?
A student loan is a type of loan used to help pay for college education. It covers tuition, living expenses, and other incidental expenses such as books.
There are three key aspects to consider when analyzing a student loan –
- Interest rate: Like other loans, student loans come with interest rates that vary depending on the lender. When evaluating a student loan, analyze the amount of interest you owe to make sure it matches your annual income so that you can repay the loan easily.
You have to be careful if the interest rates are too high. In the event of default, the bank will be forced to liquidate your assets and recover the capital you borrowed.
- Collateral: A collateral is an item of value used to secure a loan, such as a property. It is important to understand the amount of collateral that will be required to take out a student loan for your child. The amount of collateral also differs among banks, and some loans may not even require collateral if the amount is below a certain limit.
- Margin: The margin is the money paid by the applicant out of his own pocket for his education expenses. In most cases, lenders do not provide full financing with the student loan. This is especially true for students going abroad.
Instead, you will need to contribute a certain amount of money (usually a fixed percentage) to the total expenses. If the loan margin is 15%, the lender will cover 85% of the total education expenses while the loan recipient will be responsible for the remaining 15%.
Eligibility Criteria for Student Loans in India
Banks and other non-bank financial corporations (NBFCs) will usually check the following criteria before approving your child’s education loan:
- Age: Your child must be between 18 and 35 years old.
- Academics: Your child should have a good academic record.
- University acceptance: Your child must have received an admission / offer letter from a recognized university.
Tax implications of student loans
Although student loans carry interest, the amount of interest your child will have to pay may be deductible from their total taxable income. Under Section 80E of the Income Tax Act of India, this benefit can be claimed for a period of up to 8 years from the year the interest payment started.
As parents, it becomes extremely important to have a plan detailing your child’s interim higher education expenses. Instead of funneling extra money for short-term daily expenses, you can start by planning the path ahead and setting some of the parameters like education level, place of graduation, and deadlines. .
Some financial experts suggest that the safest way to make a fair estimate of the cost of education would be to assume the highest expenses. Either way, remember that the earlier you start, the better.
Plan for your child’s day after, today.