Education costs in India are rising and we all need to save more and more money for our children’s education. We all know that but I was taken aback to read in the dailies how much the costs had increased over the past few years ! While the cost of educating a child till the 12th standard and beyond that (read graduation) is something which a parent definitely needs to fund simply because the child does not have the monetary capability to do so, a lot of debate has gone into whether funding a child’s higher studies makes sense.
Let us see some numbers to check how huge this task is and whether you can save money for your child’s higher studies or not.
Cost of Child Higher Studies
The MBA is the most sought after post-graduation course after your child completes graduation. MBA can be done from a rung of second and third tier colleges. But if you want to get your child educated from the cream of the MBA colleges, the Indian Institute of Managements (IIMs) are the place to go.
The Economic Times reported that the fees of doing an MBA from the IIMs have increased in the last few years. What was scary to note was the percentage increase for this year.
IIM Calcutta had a fees of Rs 4 lakhs in 2009 which was Rs 13.5 lakh for 2012 and has moved to Rs 13.5 lakh for 2014.
Similarly, IIM Bangalore had a fees of Rs 5 lakhs in 2009 which was Rs 13 lakh for 2012 and has moved to Rs 15 lakh for 2014.
In the same way, IIM Ahmedabad had a fees of Rs 4 lakhs in 2009 which was Rs 14.5 lakh for 2012 and has moved to Rs 15.5 lakh for 2014.
For me, that sums is all ! The percentage increment in cost this year is depicted below.
The main reason for the cost increase is said to be infrastructure costs after intake of more students under quota registration.
Whatever be the reason, this lead to two questions.
- What inflation rate would you assume for post graduation costs ? Can it be consistent ?
- How much per month do you need to save money for child higher studies ?
How much to save each month for child higher studies ?
I have tried to paint scenarios of how much you will need each month for 3 inflation rates.
Here is the one at 5% and as you can see, depending on how many years away the post graduation will happen – the per month savings range from Rs 4,000 to Rs 10,500 approx. This money saved each month at 12% rate of return will help you save for your child’s post graduation.
At 5% inflation rate
The savings required at 7% inflation rate are between Rs 5,800 to Rs 12,800. Notice how an increased inflation rate requires more money to be saved each month. That is what the monster called inflation can do to your financial planning.
At 7% inflation rate
And at an inflation rate of 9%, you need between Rs 8,500 to Rs 15,400 to save for your child’s education.
At 9% inflation rate
So the question now is, can you afford to save for the best of the education for your child ? This is a huge amount by all means and with other important goals like saving for graduation and marriage for the child and your own retirement, do you think you can achieve this at all ?
Where should we invest the savings each month ?
As I have assumed that the child higher studies is a minimum of 10 years away from today, obviously this translates into a long term financial goal. So if you follow goal based investing and believe in long term investing, you know by now that systematic investment planning in diversified equity mutual funds will help you achieve the target.
Make sure that as and when you near your goal, you move away from equity and park the money into safe investment avenues like debt. Be sure to monitor the progress of the investments each year otherwise you will see your corpus deplete in case of a stock market crash in case you are fully invested in equities.
Very good analysis, good use of chart for different rates of inflation, very helpful. However i feel we should not use IIM as base to calculate the fees, their fees are always higher (brand value). Where does everyone get admission to IIM’s, most of the seats are reserved for politician, trustees and people who can give donations. I know of kid who did his IIM few years ago buy paying donations of Rs. 5 lakhs. There are many reputed colleges out there who offer very good MBA courses.
Yeah, maybe I can do some analysis with the cost of those colleges – however I am not quite sure their costs.
I went for IIMs as they are the costliest so at least now everyone knows what the MAXIMUM cost for an MBA can be…
@TheWealthWisher,
Here is the link for the fee structure of reputed colleges-
http://www.mbaindiacareer.com/india-mba.htm
If you don’t mind, I would also like to link the discussions which we had on https://www.thewealthwisher.com/2012/04/04/smart-investing-for-your-childs-future/comment-page-1/#comment-13038
Regards
BFA
I remember the discussion there but the point is whether we know what the current costs are and what future costs will be and how much per month to save for that.
Remember there are many families out there who want to save for PG courses for their kids because they can afford to do that today irrespective of what you and I advice on.
This is good for people who are looking to save for their child’s PG. I don’t think I’d be doing it.
Inflation at 5-9% doesn’t seem to be realistic given the steep hikes. I think table should have inflation values of 10-15%.
Rest all the advise is spot on!
Education inflation at more than 10% ? I think Pattu might have some better ideas here as he is a faculty.
IIM-B from 5 to 15 lakhs in 5 years. How much inflation is that?
Vivek, download the file with formulas from https://www.thewealthwisher.com/2011/05/03/random-formulas-in-excel/
If you key in the above data there, you will know the inflation rate.
Sorry but I am not able to find any formula in the excel where I can key in above values and get per annum inflation. Could you kindly guide?
Yeah it is not there, but you can reverse engineer at https://www.thewealthwisher.com/inflation-planner-calculator/
Time to make the formulae in excel – it is pretty simple – I think it is the RATE() function.
Radhey, Vivek is right. So is Sudip below. So are you. I think this is a very important aspect of planning for a child’s education. Imagine having two children with age difference of just 2 years who both want to do a PG deg !! Which is why I dont want another kid!
You have rightly said MBA is the most popular and expensive PG degree.
The fees for an MBA degree (most degrees actually but more blatant in management) are fixed depending on the average salary drawn by the graduand. At IIT Madras the fee for an MBA is at least 30% higher than all other UG or PG degrees! (one amusing aspect about IIMs: many fresh MBAs will easily earn 2/3 times the salary of most of their teachers with no industry ties!!)
At IITs and IIMs fee hikes happen only once in 5 years. But when it does happen it can be a huge jump something upwards of 30-40% (when I was a student it was close to 100%!). So it could easily amount to an annual increase of minimum 10%. One can plan with inflation of 15% but the goal would simply be unattainable.
Personally I have planned for an UG+PG cost(present) of Rs. 30 L with 10% inflation. I started a few months before my son was born so I have clear 17 years for the first big expense and 21 years for the next big expense. I am able to afford it because I am forcing a 10% annual increase in the monthly investment.
Radhey is right. Most people will not be able to fund a PG degree. If your kid is bright enough to enter any IIM then you can safely go for an educational loan because chance of getting a huge pay packet immediately after graduation is very high. You can even give your child an interest free loan from your retirement corpus. Your kid can settle it easily under 5 years.
There are literally 100s of unheard of, unrecognized PG degrees (several M. Techs for example) which are nearly as expensive but there are no such guarantees. This constitutes a problem. Getting a loan is risky in these cases especially if the kid is not smart.
Thank you Pattu for such a detailed reply.
I completely agree with what you said here.
Middle class people might struggle to send their kids to the best of the MBA colleges. I think a 10% inflation on education costs is more than enough. You take more than that and as you rightly say, the goal will be unattainable.
@Pattu,
Thanks for your detailed explanation. 30L for a PG 15 years from now should be realistic levels. I had set aside 15L for Graduation.
Thanks Pattu for the detailed explanation. However I have a couple of follow-up queries: –
1) You mentioned IIM and IIT increase fee once in 5 years, which is around 30-40%. But the data in this article shows some 200% hike in 3 years. Am I missing something here?
2) If realistic inflation is 15% and we are still taking 10% to make the goal achievable, does it make sense to have such goal?
At the end of the day regardless of the inflation you can only save how much ever you can.
If a 4 lakh fee in 2009 becomes 13.5 L in 2012 it amounts to annual inflation of 50%! Hopefully it will not remain 50% for the next 10 years!!
No one can plan any goal with 50% inflation unless they are Mukesh Ambani. Goal planning can only attempt to reflect reality to the extent the individuals saving capacity will allow. If a goal inflates at 15% and you save with a 10% figure you could at least manage about half the expense. A half full glass is better than an empty glass.
But you are right. Its tough!
Vivek, my article contains data for last 3 years (from 2009) – Pattu is talking about generic increment in fees.
The point Pattu also makes is that if the inflation is huge, one cannot save for the goal and the only option might be loans.
You can still save for the goal if the rest of the goals you have are taken care of. Split goals by priorities, keep this at priority 2 – once all your priority 1 goals are taken care of, then move to priority 2 ones – you might realize that you don’t have the funds for such goals !
I am pretty sure for higher education loan is the only way out. A middle class person cannot plan for it due to steep rises.
The justification given by educational institutions is high infrastructure costs but I don’t think this is the driving factor. The driving factor according to me is the greed and the demand. Even if they rise the fee to 50 lakhs next year there would be people who can afford it and the batch would still be full. Then why keep the fee low? This would be treated as opportunity loss in their books.
Of course they cannot raise the fee to 50 lakhs as it will be widely condemned but I am sure by the time our kids are ready for higher education the fee would be hovering close to a crore.
Massive but quite realistic figures.
Given around 15-20 years time period (considering bachelors & new parents) achieving those figures are still quite achievable through equity based SIPs, but definitely won’t be after couple of years.
Value of rupee is diminishing rapidly. So unless one start investing ASAP it will be too late/very tough to achieve all his financial goals.
Yeah, if we start early is it indeed going to be beneficial.
But personally do you think you will save money for post graduation for your kids ?
I would not as I cannot afford it today.
The other readers also feel that it might not make sense especially if we are dipping into our retirement savings.
I would encourage my child to fund his own PG but i have already made provision for it by setting aside a certain amount via SIP. Instead of going for a bank loan i may provide loan myself. But there is a very long time to go………….
“IIM Calcutta had a fees of Rs 4 lakhs in 2009 which was Rs 13.5 lakh for 2012 and has moved to Rs 13.5 lakh for 2014.”
Amount is same for 2012 and 2014, I think some update is required?
Nopes, IIM C did not increase the fees for 2014 while the others did that is why the image also does not show the % increase for IIMC.