Education financing has evolved significantly over the years. Changing dynamics in the education sector and soaring costs have made planning for your child's education a pressing concern. In the 1980s, a college education was affordable, with tuition fees often costing just a few thousand rupees. Back then, traditional investments such as Fixed Deposits (FDs), savings certificates, and gold were the preferred choices. Education was highly subsidized by the government.
However, the landscape changed as the economy opened up to the private sector, leading to a proliferation of new educational institutions and a subsequent increase in education costs. Fast forward to 2023, and education has become one of the most expensive necessities, with an inflation rate far exceeding the general Consumer Price Index (CPI).
Exploring Education Financing Options
Here are some ways you can consider funding your child's education:
1. Mutual Funds
Despite the remarkable growth in assets under management in the mutual fund industry in recent years, data from the Reserve Bank of India (RBI) shows that mutual funds attract only about 6 percent of household savings.
Mutual funds offer inherent benefits such as diversification, the potential to beat inflation, and professional expertise. With increasing financial awareness, more people might turn to mutual funds to finance their children's education. As of September 2023, there are approximately 4 crore mutual fund (MF) investors in India. However, there's room for significant growth, given that around 51 crore PAN-Aadhaar-linked accounts exist.
Mutual funds are well-suited to beat inflation in the long run, and their professional management allows investors to indirectly participate in the capital market without the need for daily monitoring.
2. Foreign Investment
For parents aspiring to send their children abroad for education, the Liberalized Remittance Scheme (LRS) is an option. Under LRS, individuals can send up to $250,000 annually from India and invest in foreign equity markets. This can serve as a natural hedge against foreign education expenses. Notably, the government doesn't collect Tax Collected at Source (TCS) for LRS up to Rs 7 lakhs for education or investment purposes, although TCS rates vary case by case.
3. Education Loans
As education costs continue to rise, education loans have become a popular choice. They offer the added advantage of income tax savings under Section 80E, where interest on education loans is tax-deductible.
At EduFund, we recommend parents create a diversified plan that combines personal investments, loans, and scholarships to optimally fund their child's education. RBI data shows a 17 percent increase in outstanding education loans in March 2023 compared to March 2022, indicating a growing trend of parents and students using education loans for higher education.
4. Government Subsidies and Scholarships
Government subsidies on education loans and scholarships, both from the government and private institutions, provide another source of funding for education. These scholarships support education in India and abroad and are often part of corporate social responsibility (CSR) initiatives.
5. Crowdfunding
Crowdfunding has gained popularity as an alternative source of financing for education. However, it's not the easiest way to raise funds, as many appeals compete for donations. Some donors are more inclined to give to medical and poverty alleviation causes rather than education. Moreover, donors may be skeptical about contributing to education needs without guarantees of academic success or stable job prospects.
6. Employer-Sponsored Education Benefits
Certain employers offer tuition assistance or reimbursement programs to help employees pursue further education. However, these programs often come with strings attached, such as requiring employees to stay with the organization for a minimum period.
Each of these options has its unique advantages and limitations. The key takeaway is that education financing is no longer a choice; it's a necessity. Fortunately, there are various avenues to explore, and with proper guidance, you can make a significant impact on your child's educational future.
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