On a laid-back evening, you sit in a comfortable place and sift through some old family photos. As you glance at one of the photos of your child, an overwhelming realisation grips you: How fast children grow up. You are not alone in harbouring that thought because parents, caught up in the humdrum of their lives, don’t often keep abreast of their children’s day-to-day growth. Change happens in a continuum, and one day the child is ready for college. But the question is: Are you, financially?
As it turns out, while we focussed mainly on retail inflation, education costs continued to rise at a higher rate. Today, if you have to finance your child’s higher education in the US, you are looking at anywhere from $25,000–$55,000 in fees, depending on the college's reputation, subject choice, etc. So, it is unsurprising that many cannot plan for it effectively. A survey delving deeper into the rising higher education costs found that the top reason why recent school graduates aren’t attending college in the academic year 2021-22 is they “couldn’t afford it”.
In fact, multiple studies suggest that college fees across disciplines and continents are increasing by at least 15 per cent annually. However, the earnings of parents aren’t increasing at the same rate. With economic cycles creating job scares, the financial outlook becomes bleak. Parents who did not provision for their child’s higher education fees from the early years often helplessly borrow loans at disadvantageous rates and conditions to fund college. That, in turn, erodes their savings and lifestyles, hampering plans for early retirement and other indulgences.
Starting strong and early
In today’s hyper-inflation reality, it is a no-brainer that parents who aspire to empower their kids with good higher education need to start saving and planning for it early on. It is never too soon or too late to start planning and saving. The idea is to start somewhere because, without savings, one could be deprived of opportunities as evident from stats pertaining to high schoolers increasingly sidestepping college. Even if you plan to have children later in life — a common practice among young adults today — you will benefit significantly by saving for a probable college fund early on.
Saving is like exercising — almost everyone wants to do it but can’t initiate it. But once you muster some motivation and start, you become habituated to it, and it is plain sailing thereon. When I was at Alico, a portion of the paycheck I received — $200 per month initially — was deducted and directed to savings plans, disabling me from spending it. Soon, I learnt that disciplined regular savings grow significantly over a period of time. That is to say, starting early and sticking to a strategic plan can help safeguard your child’s future education. There are a number of sophisticated solutions attuned to a variety of savings goals. Check out what options are available, feasible, and suit your risk profile and requirements before starting.
But before you dive into it, there are several considerations to reconcile with. For starters, depending on the time you have before the child is ready for college, you must calculate, factoring in the inflation, the amount you need to save. As often as not, that number could be disheartening. But it isn’t until you start the process that it begins to feel achievable.
Say, if you start immediately after the child is born, you have a good 216 months (18 years) to accomplish your goal. Even if you set aside a nominal amount each month, you’ll end up with a sizeable corpus, thanks to the power of compounding. However, if your savings account fetches you an interest rate of, say, 1.25 per cent every month, the amount you stand to generate at the end of 18 years could fall short of the fee of reputable colleges due to education costs appreciating by 15 per cent, on average, yearly. Additionally, you have to factor in the exchange rates, given the high chances of going abroad for college. The protracted decline of several currencies against the dollar means you must strategise the college fund accordingly.
Generating college funds through strategic investments
Irrespective of how meticulously you arrive at a number to save, pursuing it through a savings account and low-return avenues such as fixed and recurring deposits could fall short of expectations in the future. While they bring guaranteed returns, hence viable for risk-averse persons, they are self-limiting. Instead, one could explore a Systematic Investment Plan (SIP), where any amount you can set aside each month is distributed across mutual funds. With a step-up facility, you can increase the amount you deploy as and when your finances allow. Strategic exposure to certain equity-oriented funds has provided investors with over 10 per cent returns over a long period — exactly what is required to future-proof your college funds.
Also, the type of funds in your SIP should be chosen based on your risk profile and how long you have to come up with the number. If the time horizon is long, it is advisable to weather some risk early on before pivoting to safer strategies that bring in predetermined returns when the goal is in sight. In that case, you can opt for arbitrage and conservative hybrid mutual funds, whereas, in the event of medium to short-term, aggressive hybrid and equity funds carry merit.
In addition to SIPs, Regular Savings Plans (RSPs) with defined contribution terms and guaranteed minimum returns are highly effective goal-based solutions that also allow you to effectively meet long-term goals. Regular savings plans accompany some downside protection, which allows you to take greater risk and gain potentially higher returns in the early years and then rebalance into a more conservative strategy as you get closer to your children’s higher education age. They offer security as well as flexibility which is imperative for any sound long term financial planning.
Such strategies must be cushioned with term insurance covers, which, in the event of an untimely death of a benefactor parent, keeps the good-higher-education dream alive for the child. If the primary sponsor loses the ability to earn an income, critical illness and term-life insurance with disability cover can make up for it. At the same time, continued advances in technologies such as AI could revolutionise education in the future. That underscores the need for flexible, future-proof investment strategies. It is important to note that such a comprehensive plan requires considerable hand-holding from financial advisers. They ensure that you are not alone in your pursuit of empowering your children to live the best life they can and deserve.
Ashok Sardana is Founder & MD, the Continental Group
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