Align financial needs with your child's career

If your child opts for an offbeat career, getting a loan might be difficult

Mumbai-based Atul Bhosale's daughter is currently in first-year engineering and his son is in Class VII. He started earmarking funds for his children's higher studies about three years ago. Since the daughter was older, he puts aside Rs 1 lakh per month for her. For his son, he is saving Rs 50,000 a month.

His investment strategy for both are completely different. While he is using Systematic Investment Plans for both children, he uses largely debt funds for his daughter and equity for his son. The reason is the need for funds for his daughter will be sooner and his son's requirement much later. "My son is interested in aviation and wants to become a pilot, as of now. A pilot training course will cost quite a bit. I am preparing for that," he says. He has estimated about Rs 50 lakh for his daughter's education and Rs 70 lakh for his son's education.

Bhosale is in a minority. Recently, a survey by Aviva Life Insurance on the financial preparedness of parents towards supporting their children's careers, showed only 24 per cent were preparing financially. A larger number of parents are aware about the need for and the kind of training and mentoring their kids would require but when it came to money matters, parents are not as aware.

"While over 70 per cent of parents say they are willing to support their children if they want to go abroad, they talk more about coaching and training, etc. While saving for their child's education seems to be a top of mind priority for them, the actual savings process is fairly unplanned," says Anjali Malhotra, chief customer, market & digital officer, Aviva India.

Gaurav Roy, operations head, Bigdecisions.com, says, "It is not that parents haven't paid attention to their children's education and careers, but that the uncertainty around this decision is huge. Parents usually don't know what their children want to do and they are also grappling with the huge cost of higher education."

What was considered a safe career is now a myth. Today, even a job with a public sector enterprise might not be secure.

Multi-national companies might pay much higher salaries but are quick to cut on staff.

The survey was conducted across seven cities and 11,300 parents. It also showed while the most popular career choice continues to be medicine, unconventional professions like cricket and other sports, fashion designing, culinary courses, are also gaining popularity.

To support your child's dream job, you need to take financial decisions early. Use this checklist to see whether you are doing it right.

Be realistic about costs

Today, the cost of education is rising at a rate faster than inflation. Earlier, such increases were more predictable. Today, with heightened aspirations, parents want to send their children abroad even for under-graduate courses, says Roy.

"Children's education expenses often eat into the retirement corpus. This is because education costs have increased manifold. It is difficult to fund if parents don't plan early. You have to be realistic about how much you can fund yourself and think about an education loan," he says.

Parents should not hesitate to take an education loan if their child's education eats into their retirement corpus. "An education loan comes with attendant tax benefits (when it is repaid) and your child can repay it once he/she starts earning," Roy adds. The interest paid on education loan can be claimed as deduction from income tax under Section 80E. While the entire interest can be claimed as deduction, the principal cannot.

Malhotra also says while parents are willing to take a loan, often this is a last-minute resort and then it could be difficult to secure one. Hence, decide early on how much you can save and fund and how much you may need to borrow.

Start when the child's age is 12-13 or even earlier: Since it is difficult to predict how much you will need to save, it is best to start early, by the time the child is 12-13 years. By this age, you will also have a rough idea of what career she wants to pursue.

If planning to send your child abroad for undergraduate studies the costs are likely to be higher than postgraduation expenses. It is usually tougher to get scholarships or teaching assistantships for under-graduate courses, points out Roy.

In case the postgraduation course your child wants to pursue is expensive, encourage her to work for a couple of years and save some money. "This will reduce the burden when it comes to taking a loan," says Deepali Sen, founder, Srujan Financial Advisors.

Choose the right financial instruments

Another common mistake parents make is investing largely in assets that are either low-yielding like fixed deposits or are volatile and have low liquidity, like real estate, says Sen.

"Parents are happy that they have purchased an additional house or invested in FDs. But, the chance of money growing in such investments is less. When these prove insufficient to pay for their child's education, they compromise on other goals. That is why equity must have a place in your savings," she explains.

Choose highly-rated equity funds if you have more than five years and debt funds if the time is less. Sen also stresses that retirement and children's education should have the same importance in a family's financial goals and the saving should be done accordingly.

While insurance is largely a risk product, parents can include savings plans like Systematic Withdrawal Plans in their portfolio, says Malhotra. In these cases the payouts can be timed to meet expenses like preparatory classes for competitive examinations. Guaranteed return plans with options like waiver of premium in case of parents' death are useful in saving for your children's future. But, while these offer safety and guarantee of your money, they should be supplemented with higher-yielding assets to build your corpus.

Education loan for unconventional courses

Getting an educational loan today is fairly easy, provided it is for a regular course like management, medicine, engineering, etc. If for an unconventional course like film making, photography, music, art, fashion designing, etc, a loan could be difficult.

While banks may not offer loans for such courses, specialised lenders like Avanse Education Finance Services, a group company of Dewan Housing Finance, do.

Agreeing the demand for unconventional courses is rising, Neeraj Saxena, chief executive officer, Avanse says, "We have seen instances where students with high GRE scores choose to do masters in music technology."

Avanse has a product team that does research about the record of the institute, pass percentage of past students, likely salary students get once they graduate, etc. The loan may not be approved for an unknown institute.

While processing such loan applications, the lender's basic concern is whether there is a career or entrepreneurial opportunity. Other than that, the process for approval is the same as for regular courses.

In the case of prestigious institutes like Parsons School of Design, Berklee College of Music or Savannah College of Art and Design in the US, approval is easier. In India, in the case of institutions like National Institute of Fashion Technology or National Institute of Design, approval is easier as these are government institutions.

Another course seeing a lot of interest is Image Consulting. "While such a course may not yield jobs, students are assured of employment as there is a requirement for Image consultants," Saxena adds.

Average fees for such courses in foreign universities in USA or Canada would be upwards of Rs 40 lakh, in Indian institutions, it could be Rs 7-8 lakh.