The cost of education is increasing at a rapid pace, outpacing almost everything else. What seemed expensive just five years ago now appears relatively inexpensive.
Parents are constantly concerned about whether they will have enough funds when their child requires them.
The Importance of Planning for Education
Today, obtaining a basic engineering degree can cost anywhere from 15 to 20 lakhs. Medical education may easily exceed 50 lakhs. If studying abroad is the goal, expenses can range from 40 to 80 lakhs.
These figures represent current costs, not future projections. Imagine the financial burden in 15 years when your toddler heads off to college.
Without proper planning:
- You may find yourself scrambling for high-interest education loans
- Sell assets at unfavorable times to raise cash
- Compromise on the quality of education
- Burden your child with debt right from the start
By implementing suitable saving schemes, you can alleviate this stress.
Understanding the Significance of Child Education Plans
The best child education plan combines insurance coverage with savings, ensuring that your child’s education is funded even if something happens to you.
Typically, these plans lock your funds for 10 to 20 years, with maturity coinciding with your child’s college age. This ensures that the money is available when needed the most.
Key features to consider:
- Life cover for the parent paying premiums
- Guaranteed maturity amount
- Premium waiver in case of the parent’s demise or disability
- Allowance for partial withdrawals for school fees
- Tax benefits on premium payments
Not all plans offer the same features, so choose based on your priorities.
Types of Saving Schemes for Educational Purposes
There are various options available, each functioning differently. Often, a combination of several schemes proves to be the most effective.
Sukanya Samriddhi Yojana:
Designed for girls, this scheme offers excellent interest rates and complete tax exemption. The funds are locked until the daughter turns 21 or gets married.
You can deposit a maximum of 1.5 lakhs annually in this safe government-backed scheme, which typically yields better returns than most fixed deposits.
Public Provident Fund:
With a 15-year lock-in period, this scheme provides decent interest rates and complete tax benefits, along with government-guaranteed safety.
Partial withdrawals are permitted after a few years, and the funds can be used for any child, regardless of gender.
Mutual Fund SIPs:
Equity mutual funds offer long-term growth potential through small monthly investments. While returns are not guaranteed due to market fluctuations, equity investments typically outperform other options over 15-20 years.
Fixed Deposits and Recurring Deposits:
Offering guaranteed returns and complete safety, these schemes are easy to comprehend and manage.
However, the returns are modest, barely beating inflation, and the interest earned is taxable. Hence, they are not ideal as the sole saving schemes for long-term goals.
The Benefits of Starting Early
The greatest advantage you can provide your child is time. Initiate savings right from their birth.
Consider these scenarios:
Starting when the child is born – investing 5,000 monthly for 18 years at a 10% return could yield approximately 28 lakhs.
Starting when the child is 10 – investing 15,000 monthly for 8 years at a 10% return could result in approximately 23 lakhs.
Commencing early requires a lower total investment amount but ultimately leads to higher returns, thanks to the magic of compound interest.
Striking a Balance Between Safety and Growth
The ideal child education plan strikes a balance between guaranteed safety and growth potential. Pure safety may offer low returns, while high-risk investments could lead to losses.
Smart parents diversify:
Allocate 40% to safe options like PPF or government schemes to ensure a minimum corpus regardless of market conditions.
Invest 40% in equity mutual funds for long-term wealth accumulation, as they typically outperform other investments over time.
Keep 20% in liquid options like debt funds or recurring deposits for immediate access during emergencies or for school fees.
Adjust the percentages based on your risk tolerance level.
Utilizing Tax Benefits
Educational saving schemes often provide tax advantages, which should be fully utilized.
Section 80C benefits:
PPF contributions and certain insurance-based education plans qualify for deductions under this section, with a maximum limit of 1.5 lakh annually.
Sukanya Samriddhi also falls under 80C, offering tax-free returns. This triple benefit includes deduction on investment, tax-free growth, and tax-free withdrawals.
Equity mutual funds through ELSS also qualify for 80C, with the shortest lock-in period of just 3 years.
Plan your investments strategically to maximize tax savings while achieving your educational objectives.
Choosing the Right Plan
The best child education plan for your family depends on various factors unique to your circumstances.
Consider the following:
- Your current income and capacity to make monthly investments – avoid overcommitting and struggling financially.
- Your child’s current age – more time allows for more flexibility in investment choices.
- Your risk tolerance – decide whether you are comfortable with market fluctuations or prefer guaranteed returns.
- Other financial goals – balance your educational savings with other financial priorities like homeownership or retirement planning.
- Your tax situation – higher tax brackets may benefit more from tax-saving schemes.
Reviewing and Adapting
Establish automatic investments through monthly SIPs or yearly deposits to avoid skipping contributions.
Regularly review your portfolio to ensure returns meet expectations and make adjustments to saving schemes as needed.
If your income increases, consider increasing monthly investments to reach your goals sooner or increase your target corpus.
If better investment options arise, do not hesitate to reallocate funds, but consider exit charges and tax implications before making changes.
Utilizing the Funds
Ideally, education funds should only be accessed when required for educational purposes.
However, unforeseen circumstances may necessitate early withdrawals, such as major medical emergencies or family crises.
Withdraw strategically:
Prioritize using emergency funds and liquid savings before tapping into the educational corpus, which should be a last resort.
If withdrawals are unavoidable, only take the minimum required amount and allow the remaining funds to continue growing.
Some plans offer the flexibility of partial withdrawals without liquidating the entire investment, so utilize this feature if available.
Teaching Children About Financial Literacy
In addition to saving for their education, educate children about saving schemes to instill financial literacy.
Demonstrate how money grows over time, involve older children in reviewing statements, and explain the concept of compound interest in a simple manner.
This financial education is as valuable as the funds themselves, fostering discipline and planning skills in children.
When children understand the sacrifices made for their education, they tend to value it more, study diligently, and demonstrate responsible financial behavior.
Taking Action Today
Initiate at least one savings scheme this week and research the best child education plan tailored to your needs. Compare features and returns objectively.
Set up automatic monthly transfers, prioritizing your savings before other expenses.
Calculate the required amount accurately using online calculators, then determine the necessary monthly investments to achieve your goals.
Your child’s future hinges on the decisions you make today. Delaying investments by even a month can make achieving your goals significantly more challenging.
Final Considerations
The optimal child education plan involves strategically combining multiple saving schemes. No single option is perfect, so diversification is key for financial protection.
Start early, maintain consistent investments, review your portfolio regularly, and make adjustments as necessary to ensure your child’s educational aspirations are met.
