Wednesday, July 14, 2010

Education financing: Let it not be a liability

It is said that a good education is a ticket to a good life ahead. The inevitable truth is that this ticket comes at a cost which might be too uncomfortable if one is unprepared. It is quite evident that rising costs are here to stay, especially when it comes to education. Right from kindergarten to higher education the associated costs are already high; imagine what it would become 10 years from now. A burgeoning trend is the plethora of educational options available to students today. Though traditional courses like medicine, engineering, MBA are still in demand, 26% of young parents are ok to let their children decide and opt for unconventional career options such as Film-making, TV-journalism, graphic designing, and so on, as per an IMRB survey. While such professions have huge potential, a comprehensive education in the same requires a substantial initial investment. This could become a major cause of concern for both students aspiring for such professions and their parents looking to fund the education.

Money or the lack of it should never have to influence the choice of career the good news is that planning early can come to your rescue. This includes a careful and early study of financing options to reduce the burden of paying a lump sum for an expensive education. To help you plan better, there are various tools available on the web like http://www.educationisinsurance.com/ or web based education calculators to help you plan for the future cost of education. There a number of ways to finance higher education – child education insurance plans, mutual funds, fixed income schemes, etc. These investment options help the parents accumulate a large corpus for their child’s education over a period of time. The key for most of these products is to start investing as early as possible.

In case your savings are not sufficient for the child’s education expenses; you can avail of options such as education loans. However, our recommendation is that the education loan should be considered to bridge the gap between the available funding and the actual requirement. It should not be the primary source of funding.

Education loans are very common among students largely looking at professional courses in India as also education abroad. Such loans have been around for some time now. These loans do not essentially require long term planning and are offered by various banks. These loans cover the tuition fees as well as the living expense (if required) of the student while he/she is studying. The repayment of the loan normally starts 12-18 months after the student has completed his/her education, so that the student has time to build up sufficient resources and get a job. However, there is a downside. These loans are mostly offered for select credible universities, which have a good reputation and a sound placement record. This again becomes a concern for the students aspiring to pursue unconventional professions. In addition, there are other factors such as family’s income level, assets available, reputed guarantor, which are also considered while determining the amount one is eligible to borrow from the bank as an education loan.

Long term planning, that is, 10-15 years can make it much easier for the parents to cope up with the enormous higher education cost, when time comes for the child to choose what or where he/she wants to study. As mentioned earlier, there are various financial instruments available which can help you save for the same usch Mutual Funds, Fixed Deposits, Insurance Plans among other schemes. Mutual funds and Fixed Deposits work on a premise that you are going to be alive through the product term and invest regularly. Hypothetically speaking, if the parent is unable to service the principle amount due to death or contracting a critical illness after say 5 years, the nominee can still get the total corpus available on that date of the Mutual Fund or Fixed Deposit but that may not be the targeted amount. There is also no provision here to ensure a regular income stream to meet interim expenses till the child turns 18 or 21. This is where a child education insurance plan scores over other instruments. These products ensure that the higher education pool will be available as planned and the policy continues even in the event of one’s death, disability or critical illness as all future premiums will be paid by the insurance company (as a lump sum). The interim expenses like school fee are provisioned through a regular stream of income till the child turns 18.

As per the survey done by IMRB last year on saving habits of young parents, 77% of parents surveyed across India are concerned about the rising cost of education. More than 50% of the parents had started saving even before their children turned 3 years. However, 47% of parents still wished that they had started saving as soon as the child is born. A good education is an asset that can never be taken away, an investment that can never depreciate. So invest early and gift your child a bright future.

This article is written by Vishal Gupta, Director of Marketing, Aviva India.

www.credila.com

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