Education Loan vs Investment: How to prepare for a child’s future?

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Updated: November 15, 2019 12:43:13 PM

Education may be considered as an investment that, along with developing a child's innate talent, makes him/her capable for future earnings.

child education, higher education, education fund, education loan, investments for child education, Sukanya Samriddhi Yojana, SSY, Public Provident Fund, PPF, child insurance plans, life insurance, premium waiver benefit, mutual fund, systematic investmetn plan, SIPIt’s very difficult to predict how much fund would be needed when a child grows up and becomes eligible for higher education, as course fees vary widely from stream to stream and institution to institution.

Proper education not only transforms a child into a good human being, but also develops his/her earning capacity. So, in that sense, education may be considered as an investment that, along with developing a child’s innate talent, makes him/her capable for future earnings.

Now the question is how to fund the education of a child? It may be done either by taking education loan or by creating an education fund through investments.

As education builds a child’s earning capacity, in true sense, it’s an investment and there is no harm in funding it through education loan. But it’s very difficult to predict how much loan would be needed when a child grows up and becomes eligible for higher education, as course fees vary widely from stream to stream and institution to institution.

While no loan may be needed to study in a government institution, the fee, coupled with other associated expenses, for the same course may be so high at a private or foreign institution that it may become inaccessible due to ineligibility to get that much loan.

So, it’s always better to keep funds ready to fund education, or at least a part of it, and rest may be taken care of through education loan, if needed.

But the same dilemma would arise again that how much funds would be needed for higher education of a particular child? It will again depend on what the child is interested in studying and whether the particular course is available at a reputed government institute and if he/she would be able to secure a seat at the government facility.

With so many ifs and buts, it would be more appropriate to assess at his/her early age in what topics a child is interested in and what courses are available in higher education on such topics, so that you may check the current fees for such courses at reputed private/foreign institutions and then find the rate of inflation in such course fees to predict the fund requirements at the time the child becomes eligible for admission.

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There is no harm if the child gets a seat in a government institution, as the accumulated fund may be used to realise some other financial goal than become sorry for the inability to fund the higher education of his/her choice.

There are various options available to accumulate funds for children’s education. Some of the options are Sukanya Samridhhi Youjana (SSY) for girl child only, insurance plans with premium waiver benefits that ensures continuation of the policy in case of unfortunate demise of the earning member early, mutual fund (MF) etc.

While the primary aim of Public Provident Fund (PPF) is to build retirement corpus, it may also be used to build education fund. Both SSY and PPF are completely secure and tax efficient plans and are currently providing around 8 per cent rate of interest.

With child-centric insurance plans providing around 5-6 per cent return, you may hesitate to consider it for investment purpose, but at least pure insurance cover is necessary to ensure that child’s education doesn’t get hampered due to early demise of the earning parent.

If you are not completely risk averse, starting a systematic investment plan (SIP) early in a good equity scheme would be a good opportunity for you to accumulate sizable fund with smaller investments as such schemes would provide you 10-12 per cent return in long term.

So, it’s always better to start early and select an appropriate investment avenue or a combination of avenues according to your capacity and comfort and invest in regular basis to get the estimated education fund in place on time. If needed, you may take some loan for extra funding, otherwise, in case of accumulation of excess funds over and above the cost of education actually needed, you may use it for some other purpose.

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