Every year lakhs of students go to various universities in India and abroad for higher education in medical, engineering, management and others.
Sneha and Brijesh are among them. While Sneha is all set to join a US university soon, her brother Brijesh would pursue a post-graduate management program from an Indian B-School.
The high inflation in the education sector, though, has caught their parents unaware.
After the pandemic struck in 2020, almost all educational institutions were closed for over a year. However, with everything returning to normal, not only are all the fees restored, but the inflation is also up.
CPI inflation index for education for Jan ’22 was up 2.7%. Ever since it has increased, and for May ’22, it touched 4.6%. Fees of most Indian colleges are now up thanks to a general rise in the cost of living.
For those aspiring to study abroad – like Sneha – it’s been a double-whammy. Foreign universities have increased fees, and at the same time, the rupee has also depreciated sharply this year.
Sneha’s parents – who were caught unawares – bridged the gap by taking an educational loan.
Here are some ways to safeguard your children’s higher education goals:
Revisit your inflation assumption.
While arriving at a financial plan to achieve your child’s education goal, what’s the basic inflation you have factored in?
If it is in the single digits, perhaps you are being conservative (in your estimation) and stand a higher chance of underachieving your financial target.
To illustrate, MBA fees in IIM (Ahmedabad) were about Rs 4 lakh in 2009, which is now seven times that at Rs 28 lakh. It has increased by 18% each year! In turn, fees of reputed private medical colleges have increased upwards of 10% yearly.
CPI education inflation had crossed 10% levels about a decade back, thereby indicating that the possibility of double-digit inflation is real.
What about foreign studies?
The total cost of education for an undergraduate program for the academic year 2022-23 at Harvard University was up 2.7% compared to the previous year. It was up even higher at 3.7% for MIT.
In addition, the rupee fell by 5% against the US dollar last year – making the fees costlier in rupee terms. So, in the last year, the overall budget was up by at least 9% for those choosing to study in the US.
With high inflation existing in the US, boarding and renting expenses are also up, increasing overall costs for international students.
For the decade ending 2019-20, the annual cost of tuition and other fees in the US were up annually by 9.4% in rupee terms. Rupee depreciation accounted for a 5% increase while the rest (4.4%) was due to rising fees.
During the global financial crisis of 2007-08, total costs were up 26% in a single year thanks to a 21% rupee depreciation.
So, ensure your inflation assumptions are realistic to avoid surprises later. Many financial experts recommend an annual inflation rate between 10-20% for education.
What phase are you in?
Unlike retirement, the investment horizon for a child’s education is shorter – say 10-15 years. It typically has two phases.
Phase 1 – Accumulation
Phase 2 – Preparation and Preservation
In the accumulation phase, you build a corpus by saving and investing from your earned income. Since the goal is far away (at least ten years away), there is sufficient legroom to tweak portfolio risk if necessary. For instance, if you are falling short of your target – you can consider increasing more allocation to equities or saving more to get there.
Equity in the past has given 12-14% annualised returns outperforming consumer inflation by a decent margin. Investing in equities can fast-track your progress towards your education goal.
In the preservation phase, since you are now only 5-7 years from the goal, risk-taking has to be done prudently, lest it affects your corpus size. In this stage, the portfolio risk has to be gradually brought down as you approach your goal by reducing the component of equities.
If you are likely to fall short of your goal, revisit your education options to fit the bill.
Ensure you are taking at least double-digit inflation assumptions while financially planning for your child’s education goal. Also, account for overall education costs and not just tuition fees to arrive at a realistic corpus.
Invest in a portfolio of equity funds, chosen through time tested strategies, to fulfil your child's education aspirations.