How should NRIs plan for their Children’s Education| North Loop Official Blog
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14 Dec 2020

How should NRIs plan for their Children’s Education

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A lot of Indian parents consider education as a means of attaining financial freedom and stability and go out of their way to ensure that their children realize their dreams. A lot of savings and sacrifices are required to provide quality education, and this article provides insight into how NRIs should effectively plan for their child’s education.

Tuition costs and other affiliated expenses such as housing, food, and materials have been rapidly increasing through the years, and these miscellaneous costs alone add up to several thousand dollars. A college’s sticker price can shake up many families, and hardly a handful are prepared to meet those expenses.

Statistics show that the average tuition fees and related costs have risen by 144% at private National Universities, 165% at public National Universities for out-of-state students, and 212% for in-state students over the past couple of years in the US. The average increase in college fees is much higher compared to the average wage growth in the United States. However, the right amount of planning and financial aid can make funding a child’s education more affordable.

Many NRI parents ensure that their children excel in curricular activities as well as extracurricular activities, which can potentially help them make the most out of financial grants, scholarships, and other channels of financial aid. According to the 2020 Sallie Mae/Ipsos survey, close to 25% of a student’s college expenses are covered through scholarships and grants, which can help a lot of households save a good chunk of money.

How to start saving money for a child’s education?

Studies estimate college fees to be close to $100,000 for four years (varies depending on university and course), and we expect these costs to become even higher in the future.

The first step would be to figure out whether you have enough savings and assets to enroll your child in an institute of their choice. If not, you would have to figure out how much you need to save. US universities never expect the parents of a child to cover the entire course fee as a small portion of the cost is covered by financial aid in the form of grants, scholarships, loans, etc.

Studies show that a household would have to save close to an equivalent of $3000 per annum from birth to have enough savings for college. If the child is any older, then a corpus of the child’s current age multiplied by $3000 needs to be set in place.

Suppose you need to enroll your child into a university at the age of 18, which costs roughly $100,000 (tuition plus related expenses) for a 4-year course. Taking the annual inflation rate into account, the course fees (which was worth $100,000 in 2002) would have increased to $144,446.27 in 2020 (18 years). Investing $3000 annually from the birth of the child until the child turns 18 will fetch returns close to $121338.79 in 2020. These returns earned can easily cover more than 75% of the college fees in this case, and you can make the most of financial aid to cover the remaining 25% of the costs.

An alternative way of planning your savings would be to calculate the college fees taking inflation into account and working backward from that amount. Let’s use the same figures as above. A $ 100,000-course fee would sum up to $$144,446.27 in 18 years. Let us assume that you can cover 75% of the post-inflation-adjusted college fees. In that case, you would have an investment goal of $108334. Now, in order to calculate your annual savings, you would have to set a CAGR (compound annual growth rate of 8% in this example) and a tenure (let us assume 18 years again in this case). While calculating backward, we get an annual contribution figure of $2688 for a period of 18 years at an 8% rate of return.

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A proper savings plan for your child is the best way to fund their education and realize their dreams. Always make an education savings plan with an investment goal in mind and ensure that you diversify your investment portfolio to reduce risks and maximize returns.
Remember- it’s never too early to start saving for college.

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