Educational costs & inflation – A personal perspective

May is that time of the year when all parents of college going children have to figure out ways and means of arranging the fees for the upcoming semester, term or year in college, as the case may be. I have been in this situation for 5 years now and am likely to be in it for a few years more, given that I have two children.

Let me give a brief background for new readers here. My daughter Rinki has graduated from BITS Pilani, Hyderabad campus with BE in ENI. After her graduation in 2016, she has joined XLRI for their BM program and has now completed her first year there. My son Ronju is doing a 5 year dual degree course from BITS Pilani, Goa campus in Msc Maths and BE Computer Science. He will graduate in 2019 from there. If you are interested in knowing more about the overall costs and how I arranged for the funds etc, you can read up several posts available in the blog under “Education” category.

In this post I particularly wanted to discuss about the overall costs of a college degree in BITS and the inflationary nature within the course. Unlike some colleges, which give you a total figure for the 4 or 5 year course when you join, BITS only talks of the first year costs and then increases it every year. They have been transparent to say that the fees can increase by up to 15 % a year and, more often than not, it actually increases by that much. Let me take the component of the Tuition fee and see how it increased during the time Rinki was in college :-

  • In her first year 2012-2013, Tuition fee was 70000 per semester or 1.4 lacs in the year.
  • In 2013-2014, it was 78000 per semester or 1.56 lacs for the year.
  • In 2014-2015, it was 89000 per semester or 1.78 lacs for the year.
  • In 2015-2016, it was 101000 per semester or 2.02 lacs for the year.

Now apart from these there were Admission fees, hostel fees, mess fees, personal expenses, travel, practice school fees etc. From my notes I can see that the total expenses for her college degree was approximately 12 lacs.

At XLRI the overall costs are in the range of 24 lacs and you can add another 2 lacs or so for travel etc. Therefore her total Education costs in college is about 38 lacs.

For my son Ronju the last 2 years of Rinki will be common. Beyond this the fees for the other 3 years are as follows:-

  • in 2016-2017, it was 1.13 lacs per semester or 2.26 lacs for the year.
  • In 2017-2018, it is 1.30 lacs per semester or 2.60 lacs for the year.
  • in 2018-2019 it will be 1.5 lacs per semester or 3 lacs for the year.

Therefore for Ronju’s graduation the overall costs will be in the range of 20 lacs or so. I have not thought about his PG yet, as he is not sure whether he wants to do one. However if it is from a good B school, it will be in the range of 28-30 lacs. Assuming this to be the case, his total costs of college education will be in the range of 50 lacs or so.

From the above data you will be getting a pretty good picture of the educational inflation too. In 5 years the tuition fees has increased from 1.4 lacs to 3 lacs. The other costs have also increased and as you can see, a 4 year course for BITS starting today will easily cost more than 22 lacs or so, all things considered. Just the Tuition fees will be 13 lacs or so.

How will this look if your child is starting college after 15 years? Well, at an inflation of 15 % the tuition fees alone will be 1.8 crores. I know this sounds fantastic, but remember just 10 years back the Tuition fees of BITS was 50000 a year and it has gone up more than 5 times.

I am happy to spend this amount on giving a good education to my children as it is going to be a huge competitive differentiating aspect. However, I was able to do so as I prepared for the same in terms of my planning. Even then the inflation was surprisingly high and I had to rejig some of my plans.

You need to work on your plans right now and put them in place.

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Investing for your children? Invest in them instead

I often get asked about how I was able to positively influence my children into focusing at the right areas as far as their academic careers go. In reality much of it has been done by themselves, though I have been a constant presence. More importantly, I think many parents try to emphasise on the financial part of the education by investing for their children, so that they can pursue a course of higher learning, when the time comes. While this is definitely very important, a much more important aspect, often neglected, is what are you doing to invest in your children?

Whether we like it or not, parents remain the single most important source of influence for their children, till pretty much the teen years, when their peer groups and friends take over the role. If you are able to guide them properly and instil the right values in them during the pre-teen period then you would have done something really good for them. The mind of a child is akin to a blank canvas in the first 6 years after birth and this is really the right time to influence them in the right manner.

So how does one go about doing it? Well, for starters, even without any effort on your side, you have already played a role by just being their biological parents. The genes you have passed onto them will determine to a degree, how they turn out to be in future. In many ways, they will inherit your good qualities and unfortunately, most of your poor ones too. While this is something, you cannot do much about, how you come across to them is going to play a large part in the creation of their value system.

It is important to understand here that children learn the most from observing things. If there is a contradiction between what a parent is saying and doing, the child will pick up the second. Therefore, it is pointless to pontificate on the virtues of punctuality if you do not go to office on time yourself or are unable to keep some appointment you have fixed with your family. Yet, this is precisely what I have seen many parents do, time and time again. One of the key areas for you to look at as a parent is to achieve consistency between what you say and what you do. This will instil a core value in your child – words are important to honour, and your credibility as a parent will also be on a good footing.

So, in very simple terms, be a living example for your child. Whatever attributes you want him to pick up such as good manners, usage of proper language, honouring your commitments etc, must be things he sees and observes in you with unfailing regularity. Falling short of the standards ourselves and then complaining that our children have not grown up to be like how we wanted them to is really meaningless. 

How can you play a role in personality development of your child? The problem is most parents try to focus on what career they want their children to have, rather than what kind of individual persons they should grow up to be. Focus on the process and the outcome will take care of itself. Give confidence to the child that he/she can attempt all that they want, it is all right to fail at times. Our role as parents is to guide, provide for and facilitate – leave the acting to themselves. Building the self esteem of the child is really the most critical aspect of their growing up and we must never forget this. So, be it in studies, sports, music, reading or any other activities, encourage the child to try out the best possible and do not be worried about the results.

Specific to academics many parents get very agitated if their children are not doing well in school in terms of the marks that they get. It is important to be ambitious for your children but, here again, focus on the process and not the outcome. Try to guide them into being interested in what they are learning, once they are keen on that their efforts will be automatic and the results will follow. For example, if they develop an interest in Maths they will do well in it at whichever level they study it. Unfortunately, way too often we focus on short cuts, not realising that even if this brings in some short term results, the effects of these are not going to be lasting.

At the end though, you also need to steer them in the right direction when they falter. This will inevitably occur in their teens, when they are confused and a little insecure about how fast their world is changing. As a parent, you need to help them focus on the important stuff. I keep reminding my children that while college life must be fun and they need to have their fair share of it, it is also a crucial stepping stone to their future careers – one that needs to be on a firm footing. I think I recognise the potential and capability of my children, it is important for me to point it out to them.

Of course, in terms of directly being involved in their academic careers, I have been so from their early school days and continue to do so to the extent possible even today. I have been able to do it as they have chosen streams where I have a great deal of knowledge. However, even if they had studied Medicine or Commerce, the basic principles would have remained the same.

To summarise, help your children to become better human beings and they will be successful in whatever they choose to do. Even if you have not got their college fees covered, they can always get an Education loan. The question really is whether they can secure admission to a good college – that is something you can play a role in.

Top B school salaries – What and Why

In one of my posts recently, I had touched upon the issue of salaries in the top IIMs and there were quite a few responses to it. Most of the responses were unfortunately not correct and some of them went the political way rather than a reasoned discussion. In this post let me try and address this issue in a more structured manner.

To begin with my top B schools will be as follows and this post is about these. There are several other good B schools but I am not talking about them here. In order of merit these are IIM ABC, IIML/XLRI/FMS, IIM KI / SP Jain / Bajaj etc. My focus in this post will be for IIM ABC as they are really what we are talking about.

So what companies come to these institutions and what salaries do they offer? Firstly we need to understand that there are several companies, specifically in the areas of Consulting and Investment banking to name a few, that come only to specific institutes and not to others. So if one is looking at an initial job in Boston Consulting Group ( BCG ) then it is almost impossible to get through unless you are in these institutes. Some companies like Accenture do go to several other Technology and Management institutes but they look for a different profile there and not Strategy roles.

Secondly, the top IIMs and other B schools get most of the top companies in the different areas. These companies come here for they are absolutely clear they will not get such quality of people anywhere else. If you look at the recruiters from these top companies, many of them have been Alumni of these institutes themselves, so it is very natural for them to pick people from their Alma Mater.

Thirdly for the people who debate as to whether a general candidate from a top IIM is actually one of the best that the country has, let me state what it really takes to get into a top IIM today:-

  • 95 % and above in X and XII board exams. These are normalised in case of IIM B, so getting 99 % etc in a weaker board will not help.
  • CGPA of 8 and above from a good Engineering college, 9 plus will be more like it.
  • 99.5 percentile and above in CAT. About 2 lac people take the exam so you will need to be in the top 1000 people.

The above is just to get a call, and rejection rates after that is also 80 % and more. So you can easily understand what we are talking about here.

So, given all this what are the salaries offered there? Let me give some data points rather than go by isolated figures:-

  • At the topmost tier will be jobs outside India where we get to hear of crores of Rs as salaries. These are very few in numbers and can be only secured by the top few people in every year. For all practical purposes these are statistical anomalies.
  • Highest domestic salaries are typically in the range of 50-60 lacs nowadays.
  • Average salaries are in the range of 20 lacs plus.
  • Median salaries are also in the range of 20 lacs plus – this means half the students in any batch ( 240 out of 480 ) get this salary.
  • The minimum salaries are still in the range of 10 lacs plus and this is normally for people in the reserved categories – even for these people the change in them is quite extraordinary once they go through the 2 year program.

Are these salaries justified? Well, ultimately all salaries are based on market demand and supply, so companies pay for the skills and potential of the people they are taking. The debate about others not getting the same salaries even after several years is not logical. An IT developer with 5 years experience will probably get about 10 lacs but the pressure and accountability he has to face in the job is significantly less compared to an MBA in the first 2 years of his career.

So if you are in the first 2-3 years of your working life and looking for doing something different, you can consider this as an option. Of course, you will need to be really good to get through a top B school.

In today’s India I do not think there are any better opportunities than this.

Is a B school education worth it?

March is that time of the year when B school fever is at it’s peak. Most of them have had their placement season’s, leaving some outgoing students ecstatic and others rather forlorn with the job options they have landed. Throughout the country, a lot of activities are going on with the new admissions. Finally, the first year students are looking forward to the summer internships – their first exposure to significant money in corporate world.

To several students and their parents, B school education is like a holy grail that promises a lucrative career like nothing else does. The type of admission seekers we have to the B schools can be roughly divided into the following categories:-

  1. Students just graduating from college who are looking forward to earning more qualifications that will lead to better job options.
  2. Young people in the first 1-2 years of their careers and not liking it much.
  3. People in their careers for 4 plus years who are not able to see much career growth in the future – this is especially true for IT professionals.

If we simply go by available data then there is no doubt that an MBA degree from a B school of pedigree will definitely help in terms of getting the kind of initial breaks like no other alternative. People in all 3 categories listed above will see significant benefits to their careers and exceptions are rarely there. However, there are a few caveats which these people will need to keep in mind:-

  1. Selection of the right set of B schools and your ability to get into one of these are important considerations. Remember, the top 20-30 B schools will give wings to your career, the rest may not be so hot.
  2. Irrespective of which B school you get admitted to, you have to evolve as a professional manager and present yourself well in corporate life, both at the time of interviews as well as thereafter.
  3. Learning is a lifelong activity, a good B school will set you on the path but you have to traverse it through your career.

So if we broadly agree on the efficacy of doing an MBA from a leading B school, the question is where do you do it from? Let me try to answer it by a ranking hierarchy I have for the B schools when I advise students and others who seek my counsel.

  • IIM Ahmedabad, IIM Bangalore, IIM Calcutta.
  • IIM Lucknow, XLRI, FMS
  • IIM Kozhikode, IIM Indore, SP Jain, MDI, IIFT
  • IIT B schools, IIM Shillong, Other IIM’s
  • Newest IIM’s, Good private B schools

If you are able to get your MBA done from any of these you should be fine. Any other places can also be OK but then you are depending more on your ability as an individual to do well and not so much on the institution’s brand power to get you started.

How much will all this cost? Well, the figures can range from 10 lacs to 25 lacs for a 2 year education. FMS is the cheapest among the lot and XLRI is currently the most expensive. Fortunately, this is not too much of a problem as there are many banks which will give you loans covering the entire cost of education. The pay back will really not be a problem even if you are able to get a reasonable paying job and, for most people, the loan can be squared off in the first 3 years of their careers or so.

How much does one earn? The range can be quite wide and is obviously depend on which B school are you from. For the top B schools an average or median salary can be around 20 lacs per year in India. The highest domestic salaries can go upto 50 lacs or so and the salaries outside India can be 1 crore and above. More importantly, even the lowest salaries in a good B school will rarely be less than 10 lacs a year.

So, if you have the aptitude and the ability to get into one of the top notch B schools of the country, it is always a good idea to try for it. Remember, it is hugely competitive and ,unless you are blessed with the benefit of reservation, the elimination process is rather brutal. I was just in an IIMC panel the other day and we could recommend only 3 out of the 20 general category candidates we interviewed. This was after all of them had scored more than 99.5 percentile in CAT.

But that is life for you – to get the best you have to be the best too, more often than not.

Education loan – A personal case study

In the previous post I had outlined a plan that can be used for paying the Graduation expenses of a child through Education loan. Now, whether you are paying these expenses through invested money, current active income or through an Education loan, I am of the opinion that parents are responsible for the graduation expenses for the child. In effect this means, even if you take a loan, you should be paying it back and not the child. Of course, this will differ if the parent is economically weak, in which case it makes sense for the child to take care of the loan repayment once he/she gets a job.

When it comes to post graduation, my thoughts are quite different. I feel that children need to be responsible for their post graduation expenses and fund it through Education loans to be paid back when they start their working life. A second professional degree needs to be funded by the children as the purpose of it is to get a better career, after the first degree has been sponsored by their parents. Note that I am talking of expensive degrees such as an MS or an MBA here, not PG degrees from government universities that are relatively inexpensive even today.

When my daughter Rinki was looking at admissions to a good B school, she and I discussed extensively on these issues in order to figure out an optimal way in which we could do this. I will not go into details, if you are interested look up the posts in the “Education” category of my blog.She had been groomed in a way that she was quite prepared to take the loan on her own and pay it back in a reasonably short time. Her admission in the BM program in XLRI meant the costs would be 21 lacs for the 2 year course. Assuming another 1 lac for travel and personal expenses it meant an outlay of 22 lacs. While I wanted her to be responsible for this amount, I did not see much point in paying a huge amount of interest to the bank. Based on this, the plan we worked out was as follows:-

  • I will loan her the first year expenses and the second year will be funded by the bank. She will first pay off the bank loan to minimize the outgo of interest.
  • Repayment to me could be done later and would depend on factors like whether she wanted to do something on her own ( instead of a job) etc.
  • Based on this we got a 12 lacs loan sanctioned from the SBI branch at XLRI. The plan is to pay the loan in 5 years with the EMI being 25,173.
  • The loan is in her name, with her mother being the co-borrower. There is no collateral needed for the SBI scholar loan.

This plan is in motion now and I have arranged to pay the fees for the first two terms till now. I have also kept money aside for the third term fees that need to be paid in November. Though we have sanction for 12 lacs loan, we may not take the full amount – in case some surplus money is available next year, I may pay off part of the year 2 fees also.

If readers have any queries about the plan or anything about the loan, I will be happy to answer these.

Innovative use of Education loan

As all my readers will know, I am not fond of loans by a long stretch of imagination. In general, I believe that loans should not be used for consumption and, even in a crisis situation, they should really be the last resort. If a loan is needed to acquire a high value asset like a home, my preference is to pay it off as soon as you can. However, there can be some specific situations where an Education loan can be used in an innovative manner.

Before getting into the how and why of it, let us take a look at how we normally plan for the graduation expenses for our children. Typically, this will be done over a period of 15 years or so through some equity instrument such as Mutual funds through regular SIP or other mode of investment. If you have assumed a 12 % return over a reasonably long period it is likely that you will achieve your goal targets. To be on the safe side you may want to follow something like the plan below:-

  • Let us say, your estimate of your child starting his college education is in 2020 and the amount estimated over 4 years from 2020 is 12 lacs.
  • Your SIP corpus has reached a level of 11 lacs now, after the current market run up.
  • You can redeem your corpus in MF, put it into a safer debt fund and be quite certain that you will have the 12 lacs needed in 2020 when it is needed.

While the above is a perfectly acceptable way of doing things, it does have certain basic deficiencies which you may want to look at:-

  • You are redeeming your portfolio 3 years early, to be on the safe side. This may seriously hamper the growth opportunities.
  • You do not need all of 12 lacs in 2020, the requirement is over a 4 year period. It is therefore inefficient use of resources to block it in a low return debt fund etc.
  • As you are not aware of what exactly your child will land up for graduation, your need for money may be more or less than the plan you have made.

One way to look at this issue afresh is to consider Education loans from Public Sector banks. Now, the earlier rates of loans were in the range of 13% and more as it was not perceived to be a safe loan by the banks. At these prices, it does not make sense to take a loan. However, there is a class of loans nowadays, which are restricted to some listed Educational institutions, where the lending rates are way lower. At the present point of time the rates are in the range of 9.5%. With this option being available to you, the plan can be sufficiently tweaked as follows:-

  • Focus on the preparation of your child for competitive exams, so that he is likely to get into one of the listed colleges.
  • If you think it is needed for your child, have a goal amounting to 3 lacs or so when he starts in class 11, for the expenses related to coaching for competitive exams.
  • You may have earmarked an investment for your child’s graduation, but simply let it grow without getting into unproductive mechanisms of redeeming it and then putting the amount in debt instruments etc.
  • At the point of time you get admission for your child, take a sanction for the full expenses through an Education loan from a PSU bank, SBI or otherwise. Make sure it is a loan where there are no pre-payment penalties.
  • As far as payment goes. it will normally be every 6 months or so. As far as possible try to pay it from your active income if you are in a job or profession. If not look at whether it makes sense to redeem your equity investment to the extent of the installment of fees. The final option will be to get the Education loan disbursed for this part.
  • Whenever the market goes up substantially, redeem part of your equity holdings and try to pre-pay part of the loan already disbursed.
  • Over a 7 year period ( 3 years before the course and 4 years of the college), it is very likely that the markets will do well in a few years.
  • In the worst case, just keep holding equity and use the Education loan to the full extent. Start paying the EMI and when the opportunity presents itself, repay as much of the loan as you can.

Of course, there will also be situations where you have not invested adequately for your child’s education. In such cases the Education loan is a boon as it will still enable your child to study in the course and college of his choice. Once he/she passes out the loan can be paid off over a period of time.

I will encourage all of you to look at this strategy. It will ensure that your investments are being used productively and you do not need to redeem them at an inopportune time.

Education loan for my daughter

Now that Rinki has finally got admitted and started in the BM program in XLRI, I thought it will be a good idea to update the readers on the final outcome of it. I hope some of you have read the earlier posts on the considerations of Education loan and how I went about deciding on the same. If you have not read those posts, maybe you want to do so now.

To give the background of the costs involved in XLRI BM program and my thought process in going for the loan, let me outline the basic aspects:-

  • Total cost of the course for payment to XLRI is 21.04 lacs. Assuming some expenses for travel and other personal needs the total requirement will probably be 22 lacs.
  • My understanding with both my children has always been that I would take care of their Graduation costs, irrespective of the expenses and if they wanted to do a Post Graduate education they would be responsible for it. Rinki was always comfortable with this approach and knew that she will be taking up an Educational loan.
  • The XLRI BM program which she got into is the most expensive program of it’s kind in the country and several banks approached her for giving the loan up to 25 lacs.
  • As i was uncomfortable about paying a high amount for interest, I wanted to pay part of this 22 lacs on my own. Rinki could pay it back, based on her situation after she finished squaring off the loan with the bank first.
  • I had to pay the initial 5.42 lacs for confirming the application in April. Apart from this there are 2 other instalments in 2016 that I plan to pay.
  • So I was looking Rinki to take a loan of 12 lacs. The rate was 9.45 % floating based on the MCLR at present.

We had been approached by several banks as soon as she got an offer from XLRI. Though most of them had similar terms, we preferred SBI Scholar loan as Rinki already had an SBI account in her name which she could use. All banks were fine with having any one of the parents as a co-borrower, irrespective of their income levels. We decided to have Lipi as the co-borrower as it involved far less documentation that way. All the documentation needed as per the checklist was collected by us before we left Hyderabad for Jamshedpur.

The loan process itself was very smooth in Jamshedpur XLRI branch of SBI. We were very impressed with the branch manager for the way he and his staff ran the branch as well as his personal accessibility. The process was efficient in checking the required documentation and for people who needed help in filling up the form, people from the bank stepped up quite willingly. Yes, it was business for them but you do not see such levels of service even in many private banks.The branch manager was available to clear any doubt. For example, I was told that we should take the second instalment money from the bank as the sanctioned loan had to be activated within 3 months. I was uncomfortable with that as it would increase the interest burden considerably. When I approached the Branch manager he told me to take a small amount as a loan and pay the rest through our own resources. 

The sanctioning of the loan was done on the same day which was fairly amazing. The repayment duration Rinki has chosen is 5 years. Assuming she takes the entire 12 lacs, the EMI will come to about 26000 Rs. Given the jobs she will be aiming for, this should not pose an issue. In fact, she is keen to pay off the loan early if she can. The overall interest burden is about 3 lacs plus and as there is no pre-payment penalty, paying off the loan amount early will go a long way in reduction of this amount.

As far as the amount paid by me is concerned, I have told Rinki that she can look at it after she finishes her bank loan. In reality, I have a different plan for this but that can be taken up later on when the time comes.