With the cost of schooling soaring every year, parents should
put in place concrete savings and investment plans well ahead
These words have a greater meaning today. The high cost of child education may come as a big negative surprise for those who do not plan early. Be it annual school admission fees, monthly tuition fees or expenditure on transport and extra-curricular activities, the costs are soaring every year.
Mounting cost of education in recent years has eaten up a large chunk of household budgets. So it is in the interest of every parent to look ahead and plan carefully for the cost of education of their children.
Even if you have planned for your children’s higher studies by buying insurance plans and mutual fund schemes, planning for their primary and secondary education is equally important. The costs would rise further if you decide to send your children to private schools. The job only gets tougher for single earning parents.
Planning is only half the job done. To understand the gravity of the situation, let some numbers do the talking. The inflation in the cost of education is rising at 12 per cent compared with a 7-8 per cent spurt in the overall inflation (though overall inflation has dropped to around 5 per cent in the past few months).
A survey by a leading industry body showed 65 per cent of parents spend more than half of their take-home pay on their child education plans as well as on co-curricular activities, putting significant pressure on family budgets. The figure shows the growing share of education costs on a family budget.
According to the survey, parents’ annual spend on items and activities integral to school curriculum like fees, transport, books, uniform, stationery, building fund, educational trips, extra tuitions and extra-curricular activities of a single child has gone up from Rs 35,000 in 2005 to over Rs 94,000 in 2011.
The government provides income-tax relief on monthly tuition fees paid under Section 80C of the income-tax act, which has since been raised from Rs 1,00,000 to Rs 1,50,000, but Section 80C also covers several other investment instruments within the same limit. Considering the rising cost of education and higher tax breaks provided overseas, there is scope for additional tax break.
Abhinav Gulecha, founder of Sham Financial Planners, a Sebi-registered investment adviser, said: “There is scope for an additional tax break, but in the last budget the government provided additional tax breaks on medical expenditure and personal accident insurance, which are priority areas.”
“Income-tax benefit can also be claimed on the tuition fees paid in a play school by submitting receipts. Companies also allow employees to structure their salaries where Rs 100 per child per month can be claimed as income-tax benefit under Section 10 of the I-T act. Thus, one can claim additional I-T exemption of Rs 2,400 on two children,” Gulecha said.
Even without tax break, saving for education is the need of the hour. “It is critical to invest in high-growth financial instruments so that your portfolio’s rate of return is more than the rate inflation,” Gulecha added.
Can taking exposure to equities be a solution? Experts are divided on taking 100 per cent exposure to equities to build a corpus for your child education Plans
They feel it is important to plan early, possibly even before starting a family. After marriage, a couple should set aside a corpus for children’s education, which can be put into bank fixed deposits, if they are below the 10 per cent income-tax slab.
If they are in the 30 per cent tax bracket, they should invest in liquid mutual funds, where there is no exit load and the amount can be withdrawn whenever required.
For parents who haven’t planned an education corpus, there is still some time and a few options. There is a three-year period before a child goes to a play school. This time, financial planners say, can be utilised well to plan a corpus that can provide regular cash flow. However, bear in mind that this is the time for other expenses as well.
While people tend to put money together for major life goals like buying a car or a home, children’s education tends to take a back seat. One should keep a separate reserve for children’s education purposes.
“Many parents paying school fees wish they had started a savings plan when their children were born. The earlier a savings plan is started, the less is contribution needed for such a saving plan,” says a financial planner.
A longer timeframe for investment also allows investors to take on more risk and maximise returns. One should keep a monthly deposit plan, but needs to review it as costs are rising at a fast pace. Experts say one may need beef up this fund regularly after every 2-3 years after taking the rate of inflation into account.
Certain other factors should also be included to make a good child education plans. For instance, one should choose a school keeping the cash flow pattern in mind. Some schools offer the best of services and boast of their ‘brands’ but they prove heavy on the pocket too. Substantial donation and fees can burn a big hole in your pocket. Once a child is admitted to such a school, it is difficult to shift out to another school. The nature of school expenses has also undergone a sea change, compared with what it was 10 years ago. Today, expenses are bundled and they usually include coaching, art classes and extra-curricular activities.Majority of parents would spend on an average Rs 18 lakh-Rs 20 lakh in raising a child by the time they graduate from high school. While right planning can help one build a corpus to dip into, maintenance of regular cash outflow is critical. Otherwise, one would have to run helter-skelter to arrange funds in every academic season.Parents know well that they can postpone buying a home or a car but once the child has started going to school, there is no way to escape from the regular expenditure till they graduate.
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