Every parent’s dream is to see their kids getting admitted to the top universities for studies. Understandably so as that helps their children grab lucrative job offers later. A lot, however, rests on you. While child education is important, taking your eyes off retirement goals will only make your life challenging when you won’t earn and rather require a lump sum to take you & your spouse forward. So, be calculative to ensure all. There are two options – loan vs investment – for education. In some cases, you may require both. But in what mix is something a financial expert can only know better. And if you’re not, you can rely on Wishfin, a groundbreaking marketplace for top financial advisories. Let’s begin solving this interesting puzzle.
Get a Hang of Child Education Corpus First
The cost differs based on the type and location of the study. Overseas studies, understandably, would incur more than domestic studies. The cost also depends on the time of studying; educational expenses, like others, keep rising every year, by some 4-5%. And education costs not only comprise expenses related to the curriculum but even miscellaneous charges such as hostel accommodation, food, travel, etc. So, the financial planning through loan or investment, whichever you choose, must account for all. Overseas studies can range from INR 30-60 lakh, the same can reduce to INR 15-30 lakh in India.
Let’s Check the Loans Available for Child Education
There are three loans you can take for child education – Education Loan, loan against property, and Personal Loan. While education loans and loan against property can come at an interest rate of around 7-10%, personal loan rates will be around 10-25% per annum. The higher rates make personal loans not that great for education purposes. Whereas only education loans come with tax benefits under Section 80E of the Income Tax Act. So, we will compare education loans against investments below.
Compare Education Loan vs Investment for Child Education Worth INR 30 Lakh
We’ve shortlisted education loans to be compared against investments. But which investments should you use for child education? Options are many…Given the required sum, you’ll have to trust stocks that can help generate a big sum over time. In return, you will need a high-risk appetite to see off the market fluctuations affecting your investment values. For effective risk management, you can trust mutual funds and the fund managers in charge of the same. These managers put your money across different stocks to give you the benefits of investment diversification. Go online and select the top-performing equity funds that have given high returns consistently. For now, let’s compare loan vs investment on certain aspects.
|Interest Cost||INR 21,60,521||-|
|Monthly EMI||INR 28,670||-|
|Monthly Investment Amount Required||-||INR 13,000 when investing via equity mutual funds|
|Expected Annual Return Rate||-||12%|
|Tenure||15 years||20 years|
|Max. Tax Exemption Limit Allowed in a Year||Up to the interest amount debited in a financial year||Up to INR 1,50,000 in a financial year|
|Max. Tax Exemptions to Have||Tax exemptions Up to INR 15,91,697 on an education loan||Tax exemptions Up to INR 30,00,000|
Note – Tax exemptions for education loans are allowed for up to eight years only. So, we calculated the maximum exemption benefit that way for education loans. Whereas tax benefits apply to mutual funds if you invest in Equity-linked Saving Scheme (ELSS). It comes with a lock-in period of three years, so you cannot withdraw your investments before that period.
To generate more than what’s required for child education, you’ll need to invest more than INR 13,000 per month as mentioned above. You may find it hard to do so in the beginning. But as your income rises, you can create that space for extra investments to secure your retirement and other goals. Do have some 10-20% of your investment portfolio in bank deposits and other safe instruments too. That will support you when equity investments drop in between.
Coming to the comparison, it seems equity investments hold an edge over loans for child education in terms of overall benefits. You can, however, use both to meet your goals efficiently. Using both will ensure less interest burden and spare enough for emergency needs. Maybe use more investments and less loans for child education. The final call, however, is yours!