Why you should start investing for your child’s education today

Education isn’t cheap

Many Indian parents dream of sending their child to a university abroad. While studying abroad is aspirational and can help secure a bright future for their child, what many parents do not realize is the cost associated with it. Nor do they understand the difficulties of managing these costs.

Education is becoming expensive. In the United States, the average annual cost of university tuition is $40,000 (29 lakhs) and is expected to increase by 3-5% per year. To add to the tension, Indian parents have to worry about rupee depreciation while making foreign exchange transactions into dollars.

How are parents meeting their corpus?

The decision to send your child abroad is something that can change the course of your financial future. Sadly, most Indian parents are facing the negative impact of their child’s higher education on their finances by choosing riskier options for funding.

Today, the average Indian parent funds their child education by:
  • Taking loans
  • Cashing in their retirement
  • Selling real estate
Loans, loans, loans

Because education is so expensive, most parents choose to fund higher education through loans. In FY19, the total amount of loans disbursed was Rs 22,550 crore. But the silent killer with loans is the interest. Education loans in India aren’t cheap and can come with interest as high as 14.5% and a 7-15 year tenure. And while students studying at prestigious foreign universities can opt to pay lower interest on loans offered by their institutions, they are still paying off these loans in dollars.

The default zone

In theory, taking out loans and later paying EMIs seems easy. But, data shows that the national default rate of education loans (NPA) is incredibly high-10%. This is worrisome for two reasons. First, it could have a severe negative impact on you or your child’s credit score, making it harder to get loans in the future. Second, as default rates continue to increase, private institutions, such as banks, will continue to increase the interest rate on education loans.  In other words, it’s a big negative cycle.

Earning interest, not paying it.

There’s a simple solution to avoiding the potential headache that comes with loans- planning ahead. If parents start to save for their child’s education immediately after their birth, that’s anywhere between 18-21 years of savings. With foreign education, however, savings alone may not be enough. Investing these savings can generate enough interest over time to pay for a sizeable amount, if not all, of your child’s tuition.

Investing in what? Mutual funds can be a wise choice for an investment because of compounding. Compounding simply means that you earn interest on your savings, and that interest then earns interest on itself. Because of this, mutual funds have a strong history of generating returns anywhere between 6%-15%.

For example, 1,000 INR invested in a fund that earns 15% interest can help you save up to 15 lakhs over 20 years. That’s the power of compounding. And, if you’re worried about taking risk, you can rest assured that there are ways to match your appetite for risk with the right mutual fund, and still earn enough to help secure your child’s education.

But the most important factor when it comes to investing for your child’s education is starting ahead of time. Each day counts.

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