How to pay for kids college

Even before our Son was born, Naren and I discussed in detail whether or not we should pay for our kid’s college.  We both decided that our Son should be able to at-least graduate from college debt-free so he is free to pursue career & life choices.

An opportunity presented itself when our parents gave us some cash for our pre-pregnancy expenses. Since we had already kept a pregnancy fund aside when we got married, this was extra cash for us. We were tempted to use the gift money on a baby-moon vacation but we managed to keep our temptation in check, reminding ourselves of Long-term gratification vs. Instant gratification (this deserves a post in itself). That is how we started his college fund three months before his birth.

Education Inflation is double the consumer inflation In India

We had some idea that education and healthcare inflation is in double digit % in India.  But we were bit shocked to see that the education inflation is roughly estimated at 10-12% in India with no indication of going down in the future. To get a real idea we took BITS Pilani as a benchmark and went through their fees increase from year 2002-2016.

Snapshot of Bits Pilani Semester tuition from Year 2002-2016

BITS Plani Fees Increase

  • In 15 years the semester cost increased from 16 thousand to over Rs.1 lakh.

Now how does it translate into future?

Lets us take an example, the current cost of a 4 year course at BITS  is approx. Rs.20 lakhs. Estimating future annual education inflation at 12% for next 18 years, the same course will cost whopping 1.53 Crores.

College tuition fees after inflation
Snapshot of Inflation Calculation

Link to the inflation calculator used. Oh boy we are so glad that we did start early!

Our Kid’s College Fund Target- 1.5 cr in Year 2036

We only plan to fund our Son’s Bachelors Degree in India at this point. In line with above example we are targeting 1.5 crore by the time our son is 18 years i.e year 2036.

  • We are only saving for a 4-year college course of any discipline except Medicine which already costs a couple of crores currently if you don’t get into a government college.
  • We are using BITS Pilani as a benchmark for a private 4-year college as the fee is increased year-over-year regularly instead of sudden & unpredictable hikes like in the case of IITs. So from a pure planning standpoint, it is a useful benchmark.
  • If this education corpus is not enough then our kid can take up a partial education loan for the difference. This is better than being fully in the hole. Like we mentioned in our original Early Retirement Article, we want to balance both our retirement & our kid’s education goals.

Our Strategy to save for Kid’s college fund

Idea to fund college fund
Model in the photo- baby Kabir

It is straightforward – Start building corpus with a long-term wealth creation asset- Equity mutual fund. Closer to the Goal secure the corpus by moving funds to less risky debt instruments.

Debt instruments alone like PPF, Fixed deposits, debt MF’s and even real estate (unless it is land), gold are safe but not good enough to plan for Kids Education because returns are way lower than the 10-12% education inflation.

So we plan to invest in Equities through Mutual funds:

  • We will aggressively invest in Equity Mutual Funds for the first 14 years. However around midway when our Son is 7 years we will start to book profit from Equity. Market permitting we want to maintain 30% of total investment in debt instruments by the time our son is 14.
  • To ensure the availability of fund closer to the goal, we will start Systematic Transfer of the remaining college fund from Equity to debt 4 years prior to the goal date.

Below math is bit crude, but we wanted to start right-away instead of waiting till we had every investment detail listed meticulously.

  • We used an online SIP Calculator to compute the Monthly Mutual Fund SIP for first 14 years:
Our plan to fund kids college education
Mutual Fund SIP for first 14 years

@ Rs.20K SIP with a 10% increase y-o-y for the next 14 years will give us 1.3 crore pre-tax.

  • Then crudely we used lumpsum calculator to see if we moved this money 4 years prior to goal into FD @ 6% return how much will it be: fund college educationSo roughly we will have 1.65 crore pre-tax by the time our son is 18.

Of-course we have to still fine-tune for taxes, and select debt instruments-it may or may not be FD. But we think in real life it is better to start investing with rough target and then fine-tune it as you go along.

Where do we stand with our Goal?

We started SIP in Mutual Funds 3 months before our Son was born. We are investing in one Large-Cap and one Small-Cap mutual fund.

5% of college fund will be in Gold, since we received it again as a gift from grandparents who had been saving up for this occasion for a while 🙂 There’s some built-in asset allocation already as a result 😉

We started the SIP 3 months before our baby’s birth. This helped us reduce our anxiety about being new parents. It also made us feel confident about ourselves as parents. Also, now that we have our priorities straight we are not tempted to buy that extra cute little outfit with matching shoes for our little baby who will soon outgrow it.

Our Recommendation to fellow Parents

Our Recommendations to fund your kids college
Model in the photo- baby Kabir

it is not easy to juggle and save for multiple big goals. But keeping focus on achieving Early Retirement helps us to prioritise what is most important. We also recommend the same to our blog readers. Identify the goals most crucial to you and start investing early towards those goals so that compounding can work for you.

Same would be more clear from this example: We took 3 different scenarios of saving up before kid turns 18 and building on the previous example of college fund target of 1.5 crore, through SIP in Equity Mutual Funds. Return and inflation fixed at 12 %. See the target SIP to reach the Goal:

  • If you start SIP 3 yrs before birth – Rs. 10,581 per month

  • If you start SIP at birth – Rs. 12,034 per month

  • If you start 5 years after birth – Rs. 20,216 per month

Please share with us in comments your plans to fund your child’s college education and any scenario we might have missed!

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18 COMMENTS

  2. Good analysis on higher education. But what about primary and secondary level education? The cost of schooling is already a 1-2 lakhs per year per kid. And the inflation on this is well over 14% in my city. With two kids we need to set aside 5 L per year at current levels ( fees + all other components that pvt schools have invented to fleece us). Thats a huge draw on the budget for someone who has stepped away from a secure job. How do you intend to manage this?

  3. Good article on inculcating a saving habit in individuals and how to plan for the future. However, most of the assumptions on funding for Education with a focus on Engineering/Medicine is very unique to India when 80% of Engg graduates are not employable (the “Parental Aspiration Failed Me” lot).

  4. Good write-up. Yet a couple of arguments –
    (1) The fees of institutions like BITS Pilani (benchmark) was low in 90s and early 2000s but they became “too commercialised” of-late due to expansion in no. of campuses. However, now (as exhibited in your table) the fee has reached its saturation point and is already among the most expensive ones for BTech. Therefore, I don’t think the inflation shall remain as per historic patterns, given the competition and splurge of other Pvt institutes.
    (2) Even if it were to continue the high inflation; the other maths will catch up. Simply put, the rate of interest that banks give out is marginally (1bps) higher or lower than inflation rate, when checked over long-term. In 2000, FD rates were around 10-11%. Now they are 7-7.5%. If inflation really continues at historic rates, then deposit rates shall continue at same pattern too.

    I agree, we need to account for a “separate kid’s college fund” in addition to “retirement fund” or regular savings, and not mix the two. However, we need to consider a regular inflation-rate for overall calculation and not go over-cautious… (again the maths does catchup – education inflation is high, travel inflation is super low).

    • We hope you are right Mohit about education inflation. In that case, we will be done saving up for his college way before our boy is 17:-)

  5. HI,

    I am a F.I.R.E. aspirant and have 2 kids. Imagine the devastation I am going through after reading and digesting the numbers you have given above.

    Just wanted to know, is retiring early possible at all considering one needs approx 2-3 cr ( for education) and another 1.5 cr for marriage for 2 kids. This comes to around 4.5 Cr approx and hence I was wondering that the retirement kitty should be minimum around 9- 10 cr to sustain life after early retirement. Is it possible at all ???

    I don’t know the retirement kitty ( Rs XXX CR) you guys have planned, the kids expenses towards education and marriage is a part of the retirement kitty or over and above the same ?

    • Hi Neeraj, yes numbers can be overwhelming… But it is not all or none scenario..first secure/ invest for your early retirement,if you can later or simultaneously plan for their education. We are saving simultaneously for our kid’s education… retirement kitty is saperate. we are not saving anything for his wedding or post graduation . We may help him with these life events if all our other financial needs are met. I know all parents want to do their best, but everything in a life is a trade off… As far as numbers it depends on your annual expenses – use our calculator to validate them…

    • We are a bit hesitant in sharing the names for one reason that every year we re-evaluate our portfolio and we at times make changes in our portfolio too. Maybe in future, We can write a blog post sharing this information and our logic behind it. And then every year update it

      • You plan to go 100% equity till 4 year prior to goal!
        If there is a crash in the 13 th year and markets fall by 50%? (2008 crisis anyone?)

        Will equity give assured 12% in next 14 years- what if it gives 10 or 8%??

        That is risk taking of the extreme level- please do not believe what mutual fund “experts” tell you on TV.
        You should not even start with anything more than 60-70% equity and the equity has to be reduced gradually every 3-4 yrs so as to reach zero a year or two prior to goal date

  11. Education is an odd one. I guess it depends on what they’ll study. Ranges all the way from Medicine which as you said can run into 1Cr+ to what I did (CA) where my parents had barely any costs since my Articles’ stipend covered all my fees and a good bit of the classes costs as well.

    Engineering is a decent halfway so it’s a great piece of analysis..

    Personally, I figured I’ll have to cover some post gradation costs as well so I’ve estimated education costs as 50L in today’s money. Your analysis is very useful though since I was only using a 10% inflation rate on the 50L number. So what I was thinking of as approximately 2Cr now becomes 2.6Cr when my daughter turns 18. Will have to add some investments to that bucket.

    • We would consider ourselves very lucky if our kid can graduate without costing us any/much money like you did:-)

      We initially took 15% inflation! But general estimate is 10-12% so we later reduced it to 12%. It should be a good benchmark.

      Glad you found our blog post useful.

  12. Spot on.. bloody education !! I just got scared thinking why I haven’t planned so much for grad for my kid and then realized my goal is 5 years before yours and that reduced it to about 80 lakhs.. a sigh of relief ( temporary)

    Though I am sure you have put that in calculation but at 6% assumption from debt fund, you will need a little less ( 15 lakh less ) given all the fees won’t go in one go and you can liquidate semester wise.

    Medical is out of reach and we might as well also have to follow the same path of debt free graduation.other day was talking to a colleague from isb, the MBA stands at 33Lakh RS right now..at 20 years from now at 10% infaltion ,we are talking about 2.4 crore !! Don’t know how will some body break even unless the average salaries also come out to be 2 crore at that time.

    Compounding in this case is atrocious;) last 6 years contribution to cost is so high.. where as last 4 years compounding of saved amount is just at 5-6%

    India is on path of US style education cost given education debt in US now is more than any other type of debt

    Hope the online and self tutoring evolves faster and college degree is not the ultimate stamp for selection criterias for jobs/ opportunity

    • Hahaha! Oh boy what relief you must have felt!

      Ya, we also thought of it initially, but then realised that inflation will also happen while our kid is in college:-)

      Education inflation as well as Employment is a challenge in USA for some time now. And India will be worse because of our over-population and poor quality of education.

      I concur with you on online education. Thanks to technology, There is so much quality information available today from all over the world for free or at a reasonable cost at your home. We think that traditional education system which has many flaws to begin with would not be only avenue for educating oneself in future.

      Anyway an average school and college in India lacks quality and relevance. Self-education is almost necessary to bridge these gaps.

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