What should be my monthly SIP for higher education for a 10 year old?

xThere has been a petrifying rise in education costs over the past few years. Essentially, this rise has involved increasingly burdening households for the payment, creating a situation in which education beyond the secondary level is essentially unaffordable for most working people, and even school education involves costs for families that can be very high.

This got one of our clients, Ria, wondering how much money it would take to get her son educated for higher education. 

Inputs we received from Ria :

  • Her son is currently 10 years old. The time for his post-graduation first year is in 10 years.
  • The current average cost of post-graduation in engineering is 40,00,000 for 4 years of engineering.

PS: She doesn’t want to force her child to do engineering but wants to ensure she has enough funds if he wishes to do so. She probably wants to be ready for overseas expenditures for post-graduation too in case he wishes to do the same.

Now before we start calculating, please note that the inflation is usually considered as 6% but as we know education cost has been increasing at a higher rate, we generally consider an inflation rate of 10% for education.

STEP 1:  Risk Profile 

It is necessary to know your risk profile before you invest in any of your financial goals so that you can invest accordingly.

Therefore, we suggested Ria do the same. Her Risk Profile was Growth (She computed her risk profile using our calculator from the website –  Risk Calculator). 

As per the growth risk profile, your investments (portfolio) must be divided in the ratio of 70% in Equity and 30% debt. Also, given that the education goal is a long-term goal, we advise Ria to invest as per her risk profile. For the purpose of calculation, we consider the historic returns of equity at 15% whereas debt returns of 8% approximately. Therefore, her average portfolio return should be 12.9%

STEP 2: Calculate Monthly Investment Amount  

ComponentsAmount
Current Cost of the Goal INR 40,00,000
Rate of Inflation Assumed10%
Future Cost with InflationINR 77,94,868
Current investment-linked towards the goal0
Expected Returns from Equity15%
Expected Returns from Debt8%
Suggested Initial Asset Allocation between Debt: Equity-based on their Risk Profile30:70
Avg. Portfolio Return Assumed12.9%
Monthly Investment Required INR 38,555 

Above is the self-explanatory working of how much Ria needs to regularly (monthly) invest to accumulate the corpus to her son’s post-graduation expenses. This required an amount of Rs. 38,555 to be invested in a given ratio of 70:30 in equity and debt mutual funds. 

We also advise Ria that her investments in the ratio of her risk profile would continue till year 7. From year 8 the goal would become a short-term goal and she would have to gradually convert the equity portion to debt. We would not want her to take any risk with her investments and her son’s goal of completing his education. 

STEP 3: Revisit your portfolio.

It is important to have a yearly portfolio review and to rebalance the portfolio according to their required asset allocation for every goal based on the time available. 

Read – Smart investing: Time to rebalance your investment portfolio -to learn more about it

Wealth cafe advice:

We also advised Ria to not invest all her savings in her kid’s education goal but also keep other goals in mind such as her own retirement goal. One must look at their investments from an overall perspective and not just at one or two things.

We have a calculator to help you compute the monthly SIPs required to achieve your goals, so you can move around your numbers, in the same way, to compute for yourself. – https://financial.wealthcafe.in/saving-calculator/

Enroll to our course: NM 105: Plan & achieve your Goals – to make your own financial plan and to learn how the whole investment thing works.

You can also check out our blog – Goal Based Investing

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An Education Loan Guide Book

Quality education comes with a hefty price tag. In today’s education arena, competition is stiff and it is often the ones with the heavily lined wallets that beat out the rest. Fearing losing out on a seat in a premier institute because of lack of funds, parents try their best to gather and keep aside as much funds as possible; but despite their best efforts, they may tend to fall short. During this time education loan comes to one's rescue, as it helps to bridge the gap between the shortfall and the needed money.

What is an Education Loan?

The term education loan refers to the sum of money borrowed to finance school or college-related expenses. Repayment of the loan is generally deferred when the students are studying in school and a six-month grace period is provided post-graduation.

Types of Education Loan in India

In India, the types of Education Loan are broadly classified as Undergraduate Education Loan Graduate Education Loan Career Education Loan

1.      Undergraduate Education Loan: It is a loan which can be availed by students who have completed their secondary education and are planning to pursue further courses to enhance their skills for securing a job.

2.      Graduate Education Loan: These loans can be availed by students who are planning to pursue an advanced degree or higher education at colleges. To apply for this loan, students should have completed theirs under graduation courses.

3.      Career Education Loan: As the name suggests, the career education loan can be availed by students who prefer to attend undergraduate career-oriented programmes provided at technical and trading schools and colleges (like ITI) in the country.

How Does An Education Loan Work?

An education loan helps students to cover the expenses incurred for their academic fee and it also covers their non - academic expenses which occur during their tenure as students. The provision of a student loan unlike any other kind of loan comes in with a set of payment terms and the interest will be charged over the initially borrowed money. An education loan is also known as Student Loan. The EMIs for student loans should be paid over monthly installments which allows the applicants to repay the loan amount through step - by - step procedure.

Eligibility for an Education Loan

·         The applicant should be a resident Indian.

·         The applicant should be aged between 16 - 35 years.

·         The applicant should have either secured admission in any of the designated educational institution or a college which is approved by the bank. Most of the government and some of the top private ones are being recognized by the relevant competent government body and are usually included in the list of approved institutions for an education loan.

Please Note: The education loan covers the complete school fees until the completion of the course and is disbursed to the institution directly from the bank (the money will not be handed over to the students). Any kind of boarding and lodging expenses incurred by the students (includes relocation to a different city for studies) should also be included in the education loan.

 

List of Expenses included in Education Loan

A student loan covers almost all kinds of academic expenses incurred by a student. Almost all the banks in India provide loans that cover both tuition fees as well as other institutional expenses. It is better if students can check beforehand if their chosen bank or the financial institution will cover all the expenses or not to avoid inconvenience at a later point in time.

Academic Expenses Covered in an education loan

·         Registration Fee

·         Tuition Fee

·         Capitation Fee

·         Examination Fee

·         Counselling Fee

·         Laboratory Fee

·         Hostel Fee

·         Library Fee

·         Transportation Fee

·         Food (Mess) Fee

·         Study Visits and Education Tour Fee

Non - Academic Expenses Covered in an education loan

·         Building Fee

·         Student Insurance Refundable Caution Money

·         Transport and Commuting Expenses

·         Laptop

·         2 - wheeler Equipment and Project Expenses Student Welfare Contribution

·         Entrance Exam Fee (GMAT, TOEFL, LSATS, MCAT, GRE, SAT Exam and so on)

·         In-Flight Expenses (abroad studies)

 

List of Things to Keep in Mind Before Applying for an Education Loan

Opt your Institute Carefully

Most of the Indian banks and financial institutions will have a list of accredited universities list and they usually restrict themselves to lend loans to the universities or colleges which are listed with them. They also have a few blacklisted universities for which applications will be rejected. If in case, your chosen institute is not on the list of the bank's pre-approved universities then it is better to look out for banks or other institutions that will provide education loans based on the reputation of the institute.

Such banks take note of certain factors like rating, job placement facility, infrastructure into consideration before approving education loans. Students who are planning to study in India can apply for universities that are recognized by the government, University Grants Commission (UGC), Institute for Mediation and Conflict Resolution (IMCR), All India Council for Technical Education (AICTE), and so on. Those who are planning to study abroad should look for the university's reputation and standing.

Maximum Amount for Education Loan

For higher education in India, one can secure a loan of up to Rs 75 lakh with a maximum repayment tenure of up to 15 years. If you are looking for abroad education, then the maximum loan amount available for students is Rs 1.5 crore with a maximum 15 years repayment period.

Interest and Processing Cost

The interest rate for education loans in India stands between 8.50% - 15.20%. Some of the banks provide interest rates at discounted rates if you pay interest on time. Few banks even provide a concession for women applicants at a rate of 0.5 percent. One should also check for the processing fee which is refundable at times based on the bank from where you are procuring the loan amount. Some of the lenders fix processing fees between 1% - 2% of the entire loan amount. In the case of public and private banks, the processing fee ranges between Rs 5,000 - Rs 10,000. Please Note: One may have to incur additional charges like administration fees and service charges during the loan application process.

Decide on the Marginal Amount

Marginal amount refers to the amount which one needs to pay and it ranges between 5% - 15% based on several factors such as the rating of the institute, location, subject. Bank usually funds 80% - 90% of the total required amount for education the remaining part has to be pitched in by you (or parents) from your saved funds. Some of the banks and financial institutions even offer to foot the entire cost based on the student's academic background and performance over the years.

Collateral And Co-Applicants

As per the RBI norms, if your loan amount is less than Rs 4 lakh, then you need not pledge any collateral nor you will have to arrange for anyone as a third-party guarantee or as a co-applicant. If your loan amount exceeds Rs 4 lakhs, then you may be asked by your bank to arrange for a co-applicant. Banks will seek collateral if the loan amount exceeds Rs 7.5 lakhs.

Repayment Holiday

In the case of a student loan, banks usually give a moratorium period (time frame wherein you have availed a loan but has not started for repayment) and hence it is better if you can plan and pay interest during this tenure as interest will accumulate on a simple interest basis during this period. If you start paying your equated monthly installments (EMIs) during the moratorium period, then you can prevent the loan amount from becoming bigger.

 

Each year, millions of college hopefuls flood into Indian banks to get financial support for their college careers. It can seem daunting, with dozens of forms from multiple institutions, but knowing where to start and what to ask can make a world of difference.



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