Considering the multiplicity of variables, it is best that you start planning today
My daughter first went abroad for her undergraduate studies in 2006. The exchange rate then was around 85 to the British pound, and for the first couple of years trended lower to 77. I was happy as the inflation in fees in local cost was offset by a strengthening rupee. In her final year, the trend reversed and I recall transferring fees for the first semester at more than 90. The fluctuations were too wild to be covered in the calculations a typical financial planner like me would make.
Culturally, children’s education goals rank high up, if not first for Indian parents. It is not unusual to find clients prioritizing children’s goals over their own retirement. Planning for this goal is in itself quite a task. Add to it the stress of planning the expenditure in another country and another currency, and the issues multiply manifold.
Here is a primer to the factors to be considered when you are in—or likely to be—in such a situation.
Research about costs
The cost of education overseas varies largely within the country of selection depending upon the ranking of the college, location (city or suburbs or university town), the type of course (medicine will cost much more than a liberal arts course), accommodation, food plans, local transportation costs and so on. An undergraduate degree (tuition alone) could set you back by $20,000-55,000 (12-33 lakh) a year for a four-year course in the US. As you can see, the range is wide; and sometimes, the other costs may end up being marginally higher than the tuition costs. You may be forced to consider a college which offers higher scholarship.
Provide for additional costs
Mobile phones, local travel in the country and visits back home need to be budgeted for. Some colleges have a trimester system and children are returning home at the end of every term, or within 10 weeks. Invariably, vacations will coincide with peak travel and full-fare tickets are the only option.
On average, inflation is higher for education, especially when it comes to developed nations such as the US, the UK and Australia. The college itself will share the rate at which it expects its tuition fee to rise yearly.
Consider an education loan
Apart from helping to get over a financial difficulty or a cash flow hardship, an education loan may instill a sense of commitment to the course, and to work later. If the student has relatives abroad, it may be possible to obtain a foreign currency loan at a lower rate, but this may involve a commitment to work abroad. Issues regarding work visa also need to be considered.
Start saving early
This is easier said than done, as the decision to consider an overseas option is suggested by your child fairly late. Parents today do want to provide the best for their children, which today will mean greater flexibility in selecting academic combinations which are difficult to pursue in India. Hence, it may be prudent to start saving as soon as your child enters school. If you expect overseas education to cost 35 lakh per year and expect inflation to be 10% per annum, the future requirement for a four-year course starting 18 years later will be 9 crore. If you were to invest 1.5 lakh per month from the time your child was three years and earned 12% a year on your investments, you would meet the goal.
The savings figure itself seems stiff, but the assumption that the currency will not depreciate may seem foolhardy. If the currency was to depreciate by 5% per annum, the monthly savings will need to be ramped up to 2.5 lakh per month in the above example. One of the ways to cut risks is to invest part of these funds in the currency it is intended to be spent in. However, not too many children know in advance exactly which country they intend to study. One solution could be to invest in US dollars, as it is not only the most accepted currency, but also easily convertible and arguably the safest. You could have a portfolio built systematically over years in multiple currencies—dollar, pound and euro.
A simple way to achieve this could be through international feeder funds available for investing in rupees. In fact, in the past two years, US funds have returned 27% per annum in rupee terms.
My son followed my daughter a few years after she completed her education. The pound had fallen to 63. Considering the multiplicity of variables affecting the funding of overseas education goals, it is best that you do not leave things to chance and start planning today towards achieving that “international experience" for your child.
Lovaii Navlakhi is founder and chief executive officer, International Money Matters Pvt. Ltd.