In the previous article, we discussed how to save your child from a student debt trap. In this article, we will discuss whether should you take a loan for a child’s education.
The cost of education has been steadily rising. Many parents struggle to provide for their children’s educational expenses. Today, the price of an MBA ranges from Rs 10 lacs to Rs 25 lacs.
If you want your child to attend top-tier universities abroad, then the cost automatically multiplies!
Given the exorbitant price of college and the innate desire to give your child the best education possible, you may think about either saving money or borrowing money. Let us examine these two choices in more detail:
Education loan
Access to education loans is simple and is given by all of India’s leading financial institutions. An advantage of an education loan is that it is readily available.
You don’t need to spend years building up a corpus. You can pay for your child’s education in a few short weeks. Of course, the interest rate is a major drawback.
An education loan typically has an interest rate between 10% and 13%. Of course, this increases the price of schooling overall, which is already relatively high. Education loans have the drawback that your child will be responsible for paying them back once they are old and working.
Education loan puts undue pressure on your child. They may not be able to pursue a career that aligns with their interests because of the pressure of large repayments. This kind of debt may unnecessarily burden the family finances in the long run.
Thus, taking on an education loan is efficient yet the interest rates and pressure of repayment can be mentally and financially stressful for the family and your child.
Let’s look at investment as a means of paying for your child’s education.
Investment
Investment is an underutilized way of paying for your child’s education. Many parents turn to loans rather than saving for their child’s educational needs.
Investment requires time and depends upon your child’s age and the kind of education they want to pursue in the future.
By utilizing a strategy for systematic investment in an equity mutual fund scheme, you can leverage the power of compounding to accumulate a sizable corpus by setting aside a manageable sum each month to pay for your child’s education.
There are no interest charges or payback obligations. Although you can immediately support your children’s education with an education loan, it might not be the most excellent choice.
Your children will eventually be required to contribute a portion of their future income to the debt repayment. The repayment burden frequently emerges as a crucial factor when assessing employment alternatives.
The best way to save for your child’s education is through a SIP. Your initial investment and monthly payments are not only considerably less, but you can take care of this significant expense relatively easily compared to taking a loan.
It is important to note that tax exemptions for education loans are allowed only for up to eight years. In contrast, the tax benefits to mutual funds apply even if you invest in equity-linked saving schemes (ELSS) that come with a lock-in period of 3 years.
Coming to the comparison, it seems that equity investments offer more advantages overall than student loans. However, you don’t need to pick one; you can combine the two to achieve your objectives efficiently.
Utilizing both will ensure lower interest costs and leave money for unexpected requirements. Perhaps employ more investments rather than loans to fund your children’s education. But ultimately, the choice is yours.
