Children’s education: who should spend? how?
When we were younger – the time when we were deciding where to study – most of us would not even think of studying abroad, unless we got a scholarship. Make no mistake – my dad could have afforded and would have paid for my education in the US. I got an offer for doing CA in London. England and Wales is the origin of the CA profession.
I did not think it was going to be helpful – not even sure if that was right or wrong.
However, this post is not about me. It is about you.
How much should you spend on your children’s education? Suppose you have estimated that you need Rs. 6 crores for your RETIREMENT. You are now 53 years of age. You have about Rs. 2 crores and 6 years of working (and you also expect your Rs. 2 crores to double in this period), so you think you are comfortable. However, suddenly your kid tells you he/she has got admission in an European college – it costs Rs. 90L for the education. Your second kid is also watching.
What will you do? how does a person decide how much to spend on a kid’s education? who should decide that?
what if AT the same time your father is stuck with an illness requiring a lot of your private resources? (assuming he was not insured)…
How much will you spend on your kids wedding?
Assuming that you are willing to borrow (against your only asset – aka residential house) for funding the education and marriage of your children are you willing to borrow a crippling 80L? or say Rs. 200 lakhs for your second kid?
I have strong views, and I am lucky that my daughter is doing CA and I do not have to grapple with this question. I know people who have struggled with this question….expecting a reply from you in the comments column.
I am sure this will not happen to you….
SS
Hi Subra sir, My take is – If the kid is major, it is up to the individual to identify the scope of education and take it up. If they choose to do so, they have to self sponsor. If no means – by an educational loan from bank. Expecting parents to do the funding is a trade-off between an emotional decision and financial decision. It can vary from partial-funding/ complete-funding.
If the kid is minor, it is a decision and responsibility lies on the parents where they should send their ward to. If the education is affordable etc. This means parents may have to take risk (or take a cut) with retirement corpus – tough call. There are many underprivileged families in India with -almost always- bright kids (compared to developed places where there are privileged families with ‘go-easy’ kind of kids). They may have to accept compromised circumstances, despite the kid being brilliant. It is a tragedy.
kumar
I think the parents should set the right expectation with their children about their ability to spend on their education. All parents try to give their best to their children. At the same time, this should not happen at the cost of their retirement standards.
This is a bit difficultt to do, but parents must try and speak about their realistic ability to contribute to the expensive (foreign or management quota type) education to their children when they are in the 14-17 age bracket. If they are only able to meet the budget until their bachelor’s degree, they should tell their children about it.
Parents try to sacrifice their retirement comforts in the hope that their children will take care of them. This should only be done upto an extent, and the moment parents feel that they cannot have a stable retirement if they spend too much, they should communicate this to the children. This communication is often missing in most Indain families.
Kids must be told to start earning as soon as possible (maybe after bachelors) and start supporting themselves. If the situation permits, they can be supported for masters and beyond but it must be known to children that they should not take their parents granted.
Sriram Jayaraman
It is the parents responsibility to educate the child till graduation. Post graduation can also be supported provided its not a high budget one. But children should not expect parents to support post graduation overseas costing upwards of 80 – 90 lakhs. They need to take an education load and be responsible for paying that off too. At most the parent can part sponsor this expense.
When we see several middle class parents sending their children abroad for higher education its mostly with education loans. Its only the HNI group who can afford to completely pay the fees for higher education abroad.
trekkersid
Subra ji seems to have posed us a simple question but I am afraid the answer is fraught with myriad complexities.
Lets attempt to scratch the surface about tackling the ‘how’
There being a lot of moving parts, lets make some assumptions to guide us. A middle/higher middle class entity or household consists of husband (H) + wife (W) + one or two kids (K1, K2) + one or two parents (P1, P2). P1, P2 may not be
living together with the H but are financially dependent. We take it that H & W are financially literate and mathematically numerate. One or both are working and are going to stay together forever (excuse divorce). They earn to their
maximum potential (preferably in non INR) in an income tax friendly geography, minimize taxable income by using tax saving instruments & defer taxes by not booking unrealised profits without a pressing need. Then lead a frugal life. All
this would result in savings. Then invest them smartly. They have written down their investment philosophy and are abiding by it. They have clear financial goals segregated into short term, medium term & long term buckets. See? So many
assumptions (and open to interprations). Tweak one factor and they will be taken to the cleaners in the long term (30+ years atleast). Forget about sponsoring anyone!
The most important goal, whether or not we like it but we must provide for, is retirement. Again, CANNOT deduce a hard figure as its a moving target. How much will H live, W live, health issues/medical expenses on top of the insurance
cover, inflation adjusted geriatric care charges, state of the economy (sequence risk). There are surely more villians but lets leave it that. This translates that H + W needs to save a gargantuan amount every month to just attempt to
reach this goal alone. We are not even talking about other mandatory contributions like taking care of ageing P1, P2, primary education of K1, K2, unforseen expenses and non mandatory goals like annual vacations, buying a car, doing charity etc. Now they will first have to earmark an amount for the above goal (not too conservative, not too aggressive) and obviously step it up with a certain percentage each year. Guys like Wade Pfau & company have done PhDs on how to reach this magic figure but there is no holy grail.
With whatever is left, and assuming that kid’s grad/post grad edu is the next most imp goal, allocate a fair share every year from as early as possible. ‘Fair share’ is exactly what it is. We cannot label a kid with a degree from age 1 and ringfence an inflation adjusted amount every month. Mind you, the more important and softer skill that they need to develop is identify the area of strength of the kid. It will take years and they may not hit the sweet spot but conscious trying is all what they can do. What is the aptitude of the kid? creative, academic, methodical, analytic, street smart, art/music oriented etc. We know that things can be inculcated & practised but if they are able to identify the talents, inner compass, it is easier to hone that and there is more probability that the child would succeed. That would help them make a conscious decision of which stream to choose. As far as India is concerned, for now, only medical education seems truly a moonshot in the light of financial dynamics and tenure of the course. Architecture, Engineering, Law etc still seems in the range if W + H are doing what they are doing all those years.
Remeber, its not ALWAYS about flashy universities, fees and marketing. Let me give you an example. Doing B.Com from Lady Shriram college is quite inexpensive, and investment banks like JP Morgan go there for placements. I am not saying that it is easy to get there but they need to be aware of various options, especially in this age of google. I know people who have done an international MBA from SP Jain Dubai Singapore but still didnt land a job of ‘those’ numbers which they longed for. Cardinal truth is there is no guarantee of a cushy CTC even if you pay exorbitant fees. In investment cliche, higher risk does not guarantee higher returns. Ultimately its ROI. This is a more pertinent issue with foreign univerisities. It is mostly possible to get into big brands (if one is above average, not necessarily brilliant or outlier) like Berkley school of music (and several others) by paying fees which is a BOMB but there is NO guarantee of ROI. Makes no sense with one’s own money or borrowed money to shell out those fees. With the right upbringing & awareeness, the financial expectations are pretty much set for the kids and there is no divorce situation (about paying fees, through pocket or loan, either) when they are ripe for college. It would be a collaborative decision where W, H, K are on the same page.
So, in a nutshell, there is no right or wrong answer. It is about disciplined financial lifestyle (with minimum creep, inflation is unavoidable like taxes & death) from H & W, K working hard & smart, all keeping an open mindset, being happy to evolve with time & circumstances, going with the flow and making calls (as & when needed) based on judgement and experience.
MyFatFIRE
My view is simple, I pay for graduate education, they self pay for post graduation. My kids are still young, but that is what i have planned.
Vikas
Secure your retirement corpus and medical insurance (plus additional financial needs for medical) before committing any expenses for higher education of children.
If you own and live in a large house then you can opt to sell it and shift to a suitable apartment/house as per post retirement needs and help with children education expenses in equal proportion.
DeeeRrrr
Nowadays the cost of primary education is astronomical compared to our times. An International school comes at around 2 Lacs per annum for Nursery with confirmed 8% increase per year. In this context, there has to be a separate bucket kept for kids education and marriage right from the time we begin investment.
Couple of scenarios that I have seen:
A colleague’s son who got into a decent university in the US for MS in Electronics Engg. Around $35k per year. He got 50% tution fees waiver with a research assistant role. Off the rest, part was funded by dad and part by an education loan. At the end of 2 years of MS, the son got a job which is sponsoring his H1B.
A relative’s daughter went to the US to study for bachelors. She was the only child of a single mom. Precondition was 100% scholarship, which she managed to get.
Sourav
May be you can cite a court ruling where the father has to pay for the kid’s marriage with some “minimum” standard !!! 😀
Anand
I think education upto Bachelor’s Degree should be the responsibility of parents, and any further, kids should take a loan, scholarship and make decisions on their own.
But another point: If you read about the takeover by Left-Feminazi-PoliticallyCorrect movement of most Western Universities, it is indeed questionable whether the expenses justify sending out children and getting a brainwashed fool back.
Rohit
If retirement corpus is taken care, I would like to fund 100% KID’s education upto whatever cost.
What’s the point of keeping the money which will be inherited by them anyway once I am gone.
Let them have the head start of debt free life once they enter work force .