How much should you save for your child's education?


save for your child's education

Raj and Deeepa had heard enough horror stories about how parents had strived to save for their children’s education, but the amount had fallen short of the required corpus. They were determined to not repeat the mistakes others had made, and decided to carefully plan out how much they would require for their child’s education.

Their son Ratan was only three years old, but they had already begun setting aside funds for when he would go to college. They had grand plans for all the subjects he might want to study, all the professions he might want to pursue.

Their aspirations regarding their son’s future changed from day to day. However, their determination that he would never lack anything in his pursuit of his dreams never wavered. They tried to save any money they could spare from their regular, day-to-day expenses and set it aside in a savings deposit. They soon realised that this unorganised manner of saving would get them nowhere. The couple kept hearing from friends who had children much older than Ratan about how expensive everything was. Even parents with children attending kindergarten complained about how they had to shell out close to a lakh to get their child into school. Friends whose children were going off to college were even worse off. They were forced to break fixed deposits that they had been saving for many years to be able to afford the college fees.

In the midst of all this, Deepa met an old friend who told her how her daughter's decision to study engineering at a well-known private college had been no hassle at all. Upon enquiring further, Deepa learnt that her friend and her husband had been systematically investing in a child education plan for many years.

The long-term plan had helped them save costs tremendously, and was proving to be more than enough to fund their daughter's education. Child education plans are savings plans which help parents systematically save up over a long period of time to fund their children's education. The built up corpus can be utilised exclusively for higher education purposes, or even for meeting earlier milestones such as high school expenses. Paying a premium of as little as Rs. 2,000 a month can result in a corpus of Rs. 2,00,000 twenty years later. The higher the monthly or annual premium, the larger the corpus available to the child.

A child education plan is also extremely beneficial because it provides coverage for the child even when the parents are no longer around. If the policyholder passes away, the premium payments that are left for the term period are immediately waived off and the family is provided a sum to cover immediate expenses. Thereafter, a person previously appointed by the policyholder can decide the frequency of payouts for the child.

Education costs are on a growth trajectory, and will continue to rise led by rising inflation. While it may seem difficult to estimate how much they will be in 20 years’ time, it's easy enough once you know where to begin.

To decide how much would be required for a child's education, it is important to recognise the goals first. Are the parents saving up for school, are they saving up for college. Next, it is important to recognise the number of years available for saving purposes. This can be determined by the age of the child. For instance, if parents are saving up to meet college expenses, and if the child is aged five years already, then the parents have only 12 years in which to build the higher education corpus. On the other hand, if the child is already 12 years old, parents are left with only five years in which they must save up for college. The difference in these years will determine the amount to be invested. For instance, if there are 12 years in which the parents can build up the corpus, they can afford to pay smaller amounts as premium now. However, if there are only five years before the child goes off to college, parents will need to pay higher premiums right away in order to afford the higher education fees.

Next, it's important to determine the current costs of education. For instance, an MBA at a premium B school today costs close to Rs. 20 lakh today. Factoring in inflation based on historical trends will allow for a reasonably accurate estimate of how much college will cost by the time the child is ready to go.

An investment instrument that allows for higher returns, such as equity funds, is great for financing long-term goals. A child education plan can help parents and the child reap huge benefits from systematic savings. It allows parents to set milestones, and receive funds for the major educational milestones as defined. Even in case the parents aren't around, the child will still be able to fulfil their aspirations however they desire. ULIPs have also been proven to be a very good child education investment tool.

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