Education financing has changed over recent decades. The changing dynamics of education and increasing costs are the major reasons for this.
In the 1980s, graduation was possible with a few thousand rupees. People used to prefer traditional investments such as FDs, savings certificates, gold, etc. Those were the days of low education costs, primarily because it was highly subsidised by the government.
Later, the economy was opened to the private sector, which led to new institutions and an increase in education costs. Fast forward to 2023, and education has become one of the most expensive necessities, with one of the highest inflation rates. Education inflation is way higher at 10-11 percent than the general CPI of 6 percent. Today, graduation costs lakhs.
Parents spend around Rs 60-70 lakh raising a child until it is an adult of age 20-22. Approximately 60 percent of this expenditure is on education, says EduFund research.
This is why you cannot rely only on traditional investments such as fixed deposits (FD), gold, and so on, because they fail to generate inflation-beating returns, which is a must to afford education costs. Let’s see some better ways that can be considered to fund education.
1. Mutual Funds – Although the assets under management of the mutual fund industry have shown tremendous growth in the past few years, RBI data shows that mutual funds attract roughly 6 percent of household savings.
Investors should opt for mutual fund investments due to their inherent benefits, such as diversification, potential to beat inflation, professional expertise, etc. As financial awareness increases, more people could consider investing in mutual funds to finance education. As of September 2023, there are only around 4 crore mutual fund (MF) investors. However, as per statistic shared by Ananth Narayan G, Whole-Time Member, Securities and Exchange Board of India at the recently-held Moneycontrol’s annual mutual fund summit, the number of accounts that we have where PAN has been linked to Aadhaar as per CBDT (Central Board of Direct Taxes) is 51 crore. This means a lot of investors haven’t yet invested in mutual funds to fulfill their financial goals.
Also, mutual funds are one of the best investment vehicles to beat inflation in the long run. As it is a professionally managed investment vehicle, it is suitable for investors to participate in the capital market indirectly, without getting involved in daily monitoring.
2. Foreign investment – Parents who wish to send their children abroad can consider LRS (Liberalised Remittance Scheme) and invest money in foreign markets. For example, people can send up to $250,000 annually from India under LRS and invest in the equity market. This way, they can benefit from natural hedges, which can then be consumed for foreign education. The government doesn’t collect TCS (Tax Collected at Source) if you do LRS up to Rs 7 lakhs for education or investment purposes. However, the TCS rate varies from 0.5 percent to 20 percent from case to case.
This mode of investment is currently hampered by the logjam in the freezing of limits for domestic MFs that invest abroad. But this freeze is expected to be temporary.
3. Education Loans – With increasing education costs, education loans have become a preferred choice for many. They are a great way to save on income tax under section 80E, where interest on education loans is allowed as a deduction.
At EduFund, we recommend parents have a diversified plan with a combination of their own investments, loans and scholarships to optimally fund their child’s education. RBI data shows that there had been an increase of 17 percent in outstanding education loans in March 2023 vis-à-vis March 2022. This shows that parents and students are increasingly considering education loans to finance higher education.
Remember, borrowing should ideally be your last option. If you plan your investments and education goals well in advance, you wouldn’t need to borrow when the time comes to pay fees. Yet, if you must borrow, education loans are always on offer.
4. Government Subsidies and Scholarships – Government subsidies on education loans and scholarships provided by the government and private institutions are another source of funding for education. There are scholarships provided for education in India and abroad by corporates, as a part of their CSR activities.
5. Crowdfunding – There has been a significant increase in the number of platforms and the popularity of crowdfunding. People are increasingly getting attracted to this source of financing.
However, crowdfunding is not the easiest way to raise money though as there are quite a few such appeals active and Live, soliciting donations. Those apart, many donors prefer to give money for medical needs and poverty alleviation. Besides, anecdotal evidence suggests that donors are skeptical to give money on crowdfunding platforms for education needs as there is no guarantee that the child does well in studies. Job prospects are uncertain too and there is no guarantee that the child would continue in the field for which s/he had raised money in the first place.
6. Employer-Sponsored Education Benefits – Some employers provide tuition assistance or reimbursement programmes to help employees further their education. These programmes usually come up with strings, such as having to remain with the organisation for a minimum period.
Each of the above options has its benefits and limitations. We need to understand that education financing is no longer an option; it has become necessary. There are many options that one can consider, and if done with proper guidance, it can work wonders for your child’s future.