While there is a lot of statistics floating around on educational inflation and how an investor needs to be prepared for it, there is relatively less actual data available on the real costs and how they will be changing over a period of time while your child is in college. As someone who has both his children studying in college, I think it will be a good idea to share some real life experience in this regard.
The good thing in my examples is that they are both for Engineering colleges and a well reputed private one in BITS. As such the costs that you see in this post can be taken to be fairly representative. Also, the trending of the costs over the years will give you an idea of 2 aspects – how much are you likely to pay in future is one, what is the likely impact if the college going years of your two children overlap is the other.
Let me start with my daughter then, who went to college in July 2012 and will be passing out in 2016 June. When I saw the BITS website for the course fees, it was listed quite clearly that fees are likely to increase every year, though the increase will be capped at 15 %. Now to give you some idea the tuition fees were 70000 in year 1 for each semester and increased to 78500, 89000 and 101000 in the next 3 years. If you calculate the CAGR over 3 years it will be about 13 %, so BITS were clearly not saying things in a lighter vein. However, the total educational expenses are normally a lot more than just the tuition fees and this is the figure one will need to keep in mind. Let us look at the overall educational costs for the 4 year period. You need to remember that each year has 2 semesters. Here are the costs:-
- Cost for the year 2012 – 2013 was about 2.2 lacs
- Cost for the year 2013 – 2014 was about 2.6 lacs
- Cost for the year 2014 – 2015 was about 3.1 lacs
- Cost for the current FY will be about 3.8 lacs
Total cost for the course is therefore around 11.7 lacs. Note that when she entered college it would have been only about 8.8 lacs for 4 years. The cost escalation is not only for increase in fees but there are lifestyle related issues for the child which may push up the costs further.
Now my son is doing a dual degree course in BITS Goa, where the expenses can get a little higher as compared to Hyderabad. Also, unlike my daughter, his course runs for 5 years. A quick calculation tells me that over the 5 years the cash outflow required will be around 21.4 lacs. Even with the extra year, this is a significantly higher amount than what it cost for getting my daughter through her college.Interestingly a 4 year course starting today will cost about 20 lacs and a 5 year course about 25 lacs.
What does this mean for you in real terms, if your son is 3 years old and will go to college in 15 years? Taking the base cost as 20 lacs for a 4 year course and applying an inflation factor of 12 %, the total cost for his course comes to about 109 lacs. While this seems to be a fantastic figure, do remember that the Tuition fees for BITS has increased by 4 times over the last 8 years. Costs will increase and for the better reputed institutes with sufficient demand they will increase at a faster rate.
The only pragmatic way will be to start putting money in equity aggressively from now. 20000 per month at a return of 12 % will amount to the cost of the course we are talking about. Of course, your child may want to do something else altogether, but it is best to be prepared.