Let me write today on a topic that I have been thinking about quite a lot lately. Most people will agree that in the era of specialization that we live in, a PG education will add a lot of value to our children. If they have the capability of getting into a good course in a reputed institute, they should definitely do it. The question is how should the course expenses be funded? In essence, there are only two ways of funding it, either the child takes a loan or the parent funds it.
This is of course assuming that the course is a relatively expensive one and the child is doing it directly after his/her graduation. In the first case where the course is in a Government college or in a place where the student gets a stipend for covering the expenses it is a non-issue. In the next case the child may have worked a few years to save some money to take care of the expenses. So in effect what we are really talking about are some specific situations.
Let us understand in what context a PG education can really get expensive. Broadly, they are as follows:-
- The child is completing graduation and wants to do an MBA from a top Indian B school. This can cost anything up to 24 lacs for a 2 year course today. The IIM s at Ahmedabad, Bangalore and Calcutta are the most expensive. The one year course at ISB is even more expensive but as that requires a fair amount of work experience, people doing that would normally fund themselves.
- Same as above but the course is either an MS or an MBA from a foreign university, mostly in US, UK or Australia. This can cost anything between 50 lacs to 1.5 crores for 2 years, depending on the country, the university in question and whether the student gets any scholarship or not.
Now, Education loans can pretty much cover most of the costs in India but will not suffice for outside India. It is tough for some parents to take care of graduation expenses itself. In such a situation, an education outside India requires serious and dedicated attention to investment right from the day the child is born or maybe even before. In my opinion it does not make any sense to over leverage yourself and send your child to do a PG from a mediocre university at a great cost. I have seen real life examples of such students coming back to India and struggling to get a half decent job, while their parents are really struggling to pay back the huge loan that they had to take for the foreign education. Of course, there are people in our country who have the ability to send their children abroad for education without having to resort to any loans and they should definitely indulge their children if they want to.
So let us look at the next issue – assuming you need to pay 24 lacs or so for a top MBA course in India, should you fund it yourself or expect your child to take an Education loan ? The loan amount in SBI can be up to 20 lacs without collateral and 30 lacs with collateral if your child has got admitted to a premier institution. The collateral will obviously be provided by the parent but the key question is this – who should pay back the loan, the child or the parent? Most parents would want to do it for their children and I would normally support that, as long as they have the financial bandwidth to do so. If the parents are over leveraging themselves and thereby compromising other financial goals such as retirement. After all what is the point of funding your child for his PG and then expecting him to support you in your retirement?
There are some advantages of letting the child take the responsibility for loan repayment also. To start with it will inculcate a sense of financial judiciousness as EMI has to be paid month on month. Tax benefits are also of great help to the child as she starts earning. At the same time, in the unfortunate event of a job loss there will be a huge amount of pressure on the child in paying back the loan as there will be inevitable default, playing havoc with the credit rating. I have seen these happen to some people who I act as a mentor to, and it is really tough. A better way can be to let the child take the responsibility of the loan payment and step in if he needs support due to any unforeseen mishaps.
When I studied in IIM Calcutta, after my BE in Computer Science from Jadavpur university, the expenses were footed by my parents. In those days education loans were not available so that was really the only viable way of doing the course. Of course there were heavy subsidies from the government for IIM s then and the expenses were not high by the 1980’s standard too but for a middle class family with 3 children that would also have been a stretch.
Now when my daughter sits for CAT and will hopefully get through, I am faced with this tough choice. As a father I want to ensure that my daughter has the best of every possible opportunity. At the same time I want her to grow up as a responsible adult. I can afford the fee so giving her the best part is easy. As far as making her responsible is concerned getting her to take an Education loan will be a great starting lesson in life. On the balance, I think I will take the loan for her and ask her to pay for it based on the kind of job she gets. In the process of making her responsible, I do not want to put a huge amount of unnecessary pressure on her.
While some of us can afford it, there are many parents who cannot do so for their children’s PG or very often even for their graduation. I help out in some forum for students aspiring to join Engineering colleges such as BITS or Manipal and come across many cases where the parents earn less than 5 lacs a year and therefore quite unable to pay out 3 lacs per year for the education of their child. The easily available education loan is really a boon to such students and is a big factor in ensuring that quality education is not denied for want of money.
We criticize our public sector banks so much and so often, but in many ways, as in this, they are the true contributors in the building of our nation.