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Planning to send your child abroad for education? Here’s how to sort out the finances

Many Indian parents dream of sending their children to premier institutions abroad for higher studies. However, the proposition is expensive and hence needs long-term financial planning.

The importance of a child’s higher education planning needs to be understood in the initial year when your child starts schooling. The more the number of years you have for savings, the more wealth you will be able to accumulate for their education and the easier it will be for them to complete their studies without taking any education loan unless you cannot do without it. However, educations loan also comes with several benefits and if you fall out of money, you can easily avail it from any bank or financial institutional lenders.

Harsh Gahlaut, CEO, FinEdge told Moneycontrol that alongside planning for the tuition fees associated with the course, make sure that you adequately account for living expenses. In a country such as the U.K, living costs can be extremely high; and many people end up falling short on this front.

“Since the corpus outlay is likely to be substantial, make sure you start planning well in advance by regularly saving affordable sums of money into aggressive, market linked instruments such as mid-cap equity funds, through SIP’s,” he said.What to do?

Estimating today’s cost with a certain amount of predictability will help in not missing the final figure by a huge number. Chitra Iyer, CEO, My Financial Advisor said that once you can budget the education cost in today’s terms, you need to factor at least 8 percent as inflation year on year till the year the funds would be needed. “Apart from inflation, education cost also increases additionally in some cases. It would help if you can study how the cost has increased for a particular course over the years. Another challenge usually is the currency, dollar or pound to the rupee that can set you back by a couple of lakhs,” he said.

Plan early when the child is young, deciding how much you need to invest over a period of time, helps in setting aside funds for the corpus needed. Deciding where to invest, based on time available for compounding to take effect, your risk appetite and asset allocation will help you take the correct decisions for your child’s education. For example, if you save and invest Rs 5000 for next 15 years, you can make approximately Rs 25 Lakh (assuming rate of return at 12%). This is how compounding effect helps you generate money when invested over a longer period of time.

What not to do?

Gahlaut said that one should avoid the trap of getting stuck into opaque, low-yielding “child plans” that promise guaranteed payouts during various stages of your child’s higher studies. These plans do not grow your money fast enough to accumulate the large corpus that will be required for this goal. “Additionally, they are very costly to exit – meaning that you get locked into the vicious cycle of throwing good money after bad,” he said.

Child plans which can help you generate a decent amount of corpus for your child roughly give you around 8 to 9% of returns. The returns are quite low compared to other income generating instruments as these plans also provide you death benefit cover which is not offered by any other instruments.  Also, the returns are not guaranteed, you need to select funds to get the desired rate of return before opting for such plans. If you want to take child plan, it is suggested to take more exposure in equity funds compared to debt funds. This way you can build a higher corpus at the time of maturity.

What if you need to take a loan?

You should not worry or hesitate in taking education loan as it comes with many benefits. Not only you get a loan at a cheaper rate of interest (you can get student loan at a minimum rate of interest approximately at 9.5% which can also go higher up to 11% to 12% as the bank’s eligibility check, which they do when you ask for an education loan) but also, you can avail tax benefit too. “Keep in mind that the entire interest component of an education loan is tax-deductible under Section 80E of income tax act which also applies to a loan availed for a foreign education as well. So, if worst comes to worst and you end up falling short at the last moment, that’s a viable option,” said Gahlaut.