When planning our children’s education we tend to consider a number of nuances. These include the course fee we wish to plan for, the asset allocation for the goal and the time horizon for the goal. We may also consider a schedule to reduce the equity allocation in the portfolio over time. To understand these aspects in greater detail, have a look at my earlier article, Funding The College Dream. But there are a number of second order nuances that usually escape our attention. And these nuances impact the success of our endeavours just as much as the others. Therefore, today I am going to talk about these complex nuances and how to factor them in.
The first nuance to consider is the target cost of the education during the early years. The target corpus for the education goal depends on the preferred course of the child. But most children gain clarity on their preferred courses only between the ages of 13 and 15. In some aqcases, it may come even later. In most cases, undergraduate education in India begins when the child is 17 or 18. Waiting for our children to gain clarity on their preferences to begin planning their education would give us a time horizon of just 3 to 5 years for the goal. This would be too short a period to plan for the goal effectively.
Therefore during the initial years we must mentally set a certain amount (say 10 to 15 lakhs) as an initial target. Once we have clarity on the actual amount required in later years, the target amount can be readjusted accordingly. The target amount needs to be adjusted for inflation. One way to do this is to assume a particular rate of inflation. Considering education costs in India, an inflation rate of 12-15% may be a realistic assumption. This would mean that an initial target amount of Rs 10 lakh would grow to Rs 76 lakh in 18 years (assuming we begin planning for the education goal right when the child is born).
But our inflation assumptions may not always be accurate. Therefore a more realistic way to adjust for inflation would be to redo calculations once a year. This would allow us to keep track of inflation on an annual basis using actual figures. It would give us a more accurate estimate of the annual and monthly investments required for the goal. Illustrative calculations for the first year are shown in the graphic below.
One year later, assume the cost of the UG course has increased to Rs 11,20,000 and the value of the portfolio for the education goal is Rs 75,000. Accordingly the calculations can be reflected as shown below.
After 10 years, assume that the actual amount required for the goal is found to be Rs 25 lakh and the value of the education goal portfolio is Rs 10 lakh. The monthly and annual investments required in year 11 are shown below.
Doing the calculations this way once a year would hence give us a realistic estimate of inflation in education costs. It gives us better clarity on the annual and monthly investments required for the goal every year. It allows greater flexibility in the calculations.
We also need to be clear with regard to the extent to which we are willing to fund our children’s education. Some of us may decide to fund our children’s education until their undergraduate level. We may then ask our children to fund their postgraduate education (if they wish to pursue it) on their own. Others may be willing to fund their children’s education the whole way. The capability of the child would also play a vital role here. If the child has consistently demonstrated their academic capability, it makes sense to back them all the way. If not, we may be better off prioritising other important goals beyond a certain point. Either way, we must make it a point to clearly communicate our intentions in this regard to our children beforehand.
We must also decide whether we are willing to dip into our retirement corpus to fund our children’s education. Ideally speaking, we may be better off not doing so. We must first ensure that our own needs are met before providing for those of others. But this is a highly emotional decision for most parents. It is therefore a decision best left to the individual parents' discretion. But it is important for each parent to ensure that they consider these second order nuances of funding their children’s education. It is only then that the child's education can be planned for effectively.