How to Plan for Your Child's Education Expenses?

Being a parent, you must be concerned about whether you can meet your child’s education expenses. It is better to start thinking about the financial requirements from an early stage. 

The longer time you have, the more comfortably you can move forward towards your goal. However, you should know the steps you need to follow to develop a proper financial planning for child education.

Following are some of the steps you will need to follow to make a reliable financial plan for your child’s education:

1. Measure the Time Horizon

At this first stage of educational planning for the child, you need to measure how much time you have on your hand to save and grow the required fund. For this, you simply need to deduct the age when your child gets admission for higher studies from their present age.

2. Estimate the Cost of Education for Your Child

At this stage, you will have to calculate the approximate cost of education for higher studies. You may consider the average cost of education at present. After knowing the rate, you will have to take into account the impact of inflation as well. This will help you ensure that your financial planning for child education does not get hampered due to a shortage of funds.

3. Make Investment Strategies

After knowing the amount; you will need to develop strategies for investment and savings. You will have to make a budget to save a certain portion of your monthly income towards the fund made according to your plan for child education. By regular and calculated habit of investing, you will be able to raise the required fund in due time. It will be much more advantageous for you if you start early. It is never too late to start. However, by starting early, you will gain a greater advantage of compounding. 

4. Get Life Insurance Coverage

While you are making a financial plan for your child’s education, you should also get the coverage of a life insurance policy. It will help you safeguard your family financially. Furthermore, your family members will not have to touch funds earmarked for your child’s education to meet the financial crisis.

You can invest in the following types of investment instruments to secure the required financial backup for your child’s education:

1. Unit Linked Insurance Plan (ULIP)

ULIP is a type of life insurance plan in which a part of your premium goes towards the life cover, and the rest goes towards a fund. It is also a liquid insurance plan, allowing you to withdraw your fund value after the lock-in period of 5 years. Nevertheless, as you want to grow your money to materialise your plan for the child’s education, you should set your policy term accordingly.

What makes ULIP more beneficial than a simple mutual fund is the life cover component. In case of your premature demise, your family will get a lump sum death benefit. It will ensure that your child does not fail to complete higher education due to financial shortages after your death. 

Potential Risk: High, as the fund invest in stocks and securities which are volatile

2. Systematic Investment Plans (SIP)

In a systematic investment plan, you need to pay a fixed amount of money to a financial institution regularly. It is also like the regular premium of ULIP, but it does not give you any insurance coverage. 

Your fund will keep growing with your periodic investment and the compound interest earned on the fund. You can withdraw your aggregated fund value to bear the expenses of your child's education. 

Potential Risk: High, since the fund manager invest your deposited amount in stocks and securities

3. Public Provident Fund (PPF)

PPF is a long-term and risk-free savings scheme which grows at a certain interest rate. The savings under this scheme comes without any tax liabilities. However, you need to stay invested for at least 15 years. If you have that long a time horizon for your plan for child education, you can keep aside a certain sum of your savings in PPF.

Further, you can partially withdraw from your PPF fund after six years. So, you can also meet the short-ticket financial requirements even before the period of 15 years.

Potential Risk: Negligible, as your fund is backed by the central government itself

4. Sukanya Sammriddhi Yojana

Sukanya Sammriddhi Yojana is a post office savings scheme that lets you save money for the education of your girl child. The age of your child, however, needs to be below 10 years. You can deposit an amount between ₹250 and ₹1.5 Lakh for up to a period of 15 years. It lets you withdraw your aggregated amount when your child becomes 18 years old or passes 10th standard. 

Potential Risk: Negligible, as your fund is backed by the central government itself

5. Term Deposits

When your objective is to save and grow your money at a less risk, you can go with term deposits (TDs). There are two types of TDs which are fixed deposit and recurring deposit.

Through both these types of TD, you can grow your money at a fixed interest rate. You can also choose a tenure which can be a few months to a few years. To book a fixed deposit, you will have to pay a lump sum. On the other hand, you need to pay a predetermined amount at a regular interval, which, in most cases, is monthly. 

Potential Risk: Low, as the interest rate remains fixed throughout the tenor

6. National Savings Certificate

A National Savings Certificate can also help you grow your money at a fixed interest rate. You can leverage the aggregated amount for your child’s education. It is a post office savings scheme, having a maturity period of 5 years. You can book your certificate in this scheme by depositing an amount starting from ₹1,000. However, there is no upper cap for your deposit. 

Under this scheme, you can hold an account for a National Savings Certificate on your child’s behalf. Alternatively, if the child’s age is above 10 years, he or she can hold the account singularly. 

Potential Risk: Negligible, as the fund is backed by the central government itself

7. Debt Funds

Debt funds are a type of mutual funds in which fund houses keep the pooled money in different fixed-income instruments like bonds, treasury bills, debts, etc. As a result, investment in debt funds are less risky. It can give a high and stable return which is usually higher than the bank savings. Furthermore, the amount you can invest in this instrument is flexible. You can either start short and periodic deposit by choosing SIP or deposit a lump sum amount. The maturity period of debt funds ranges around 3 to 10 years.

Potential Risk: Low, as in a debt fund, the capital is invested in fixed-income instruments

In the previous section, you learned how much your child might need to complete their education. To summarise, you first need to research the average cost of the educational fees of the courses they will pursue. Then according to the time horizon and ongoing inflation rate, you need to estimate future educational expenses.

Now that you have the projected expenses you will need to fulfil your plan for child education, you can estimate how much you have to save regularly to build that amount. For this, you will need to follow the steps mentioned below:

Step 1: Decide your investment instrument

Step 2: Know the interest you will earn

Step 3: Use an online investment calculator that will help you estimate the regular amount you need to allocate towards your fund to reach your target on time

After these steps, the calculator will display a sum that you will have to keep aside.

Sound financial planning for child education can significantly help parents ensure they can easily arrange the required fund. In fact, it is much better if they realise the need to make this plan early. It will help them comfortably build the projected fund for their child's education.