Studying abroad: How to plan financially for your child’s foreign education

Eela Dubey, Co-Founder of EduFund, a financial planning and consulting firm that specialises in assisting Indian parents plan, save, and pay for their kid's education expenses, says that it’s not like throwing a dart in the dark. Start with a simple internet search  about the courses your child is likely to study, at the universities s/he is likely to go to. Most foreign universities lay out the costs; that’s your starting point.

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Bengaluru-based Anusha Ramprasad, who says she started planning for her children’s foreign education soon after they were born almost 20 years ago, says that it’s important to get to know your child’s personality as they grow up. Her elder son, Yash, now 20, is doing his MA  in international business management at Scotland’s Heriot Watt University’s Dubai campus.

But that wasn’t his original calling, Ramprasad tells us over the phone. She says that Yash has been interested in sports and plays football. But given that Yash was always interested in returning to India after getting a foreign degree, a career in a sport other than cricket didn’t sound lucrative.

For Yash’s visa and college admission, his college had insisted that the parents should have a fixed deposit of about Rs 90 lakh. That was three years’ worth of tuition fees, plus a bit for living expenses. So that became Ramprasad's target.

Inflation and currency depreciation: the party-poopers

The course fees you see on university websites will only increase over time. A four-year undergraduate course in engineering at the University of Michigan, US, costs $3.13 lakh at present. If your child is five years old now and you aspire to send him for such a course when he turns 18, it’ll cost you roughly $5.21 lakh then, thanks to inflation. Moneycontrol has estimated a 4 percent (education) inflation in US Dollar terms <see table>.

Inflation and currency depreciation should be accounted for, when planning for your child's foreign education

And that’s not all. The Indian Rupee depreciates too. This also inflates your costs. As on May 10, it took Rs 83 to fetch you a US Dollar. The Rupee has depreciated 3.1 percent over the past 10 years and 3.6 percent over the past 5 years. At times, the Rupee has depreciated quite sharply, which can make your costs go haywire, creating havoc when your kids are studying abroad and you are yet to pay the fees and other costs for the remaining period of their studies.

Between August 2011 and 2013, the Rupee went down by 21 percent on a compounded basis.

Say, your child is 10 at present and aspires to do his BS from Northwestern University’s McCormick School of Engineering. This gives you eight years to plan. At present, the course fee is $3.65 lakh over four years. After eight years, it may cost $4.99 lakh, assuming 4 percent inflation.  If you account for a 3-percent Rupee depreciation against the Dollar, your course fees can go up to Rs 5.29 crore.

Can you afford it?

Say, you are planning to send your kid for the Indian Institute of Management’s (IIM) 2-year post-graduate MBA programme, which costs Rs 25 lakh at present. If you have 18 years to plan, you need to set aside around Rs 18,200 every month in an equity mutual fund, assuming your fund grows by 12 percent, compounded.

Now, consider sending your kid for the Berkeley Haas MBA programme at the University of Berkeley. At present, this costs $2.48 lakh. After 18 years, it would cost about Rs 6 crore. Even if you start a Systematic Investment Plan (SIP) today, you would need to set aside Rs 78,000 every month.

Typically, undergraduate programs are more expensive than masters courses, because of their longer duration. For the two engineering programmes we spoke about, you need to invest Rs 1.49 - 1.79 lakh every month in an equity fund, if you have 13 years to go. If you have less time on your hands, you need  to set aside more.

Dilshad Billimoria, Director and Chief Financial Planner, Dilzer Consultants, a financial advisory firm, says that funding one's children’s education has to be built into the family's financial plan. “We ask our clients if they wish to plan for Indian or foreign education; that’s really the starting point,” she says.

Billimoria adds that not every parent can afford a foreign education for their children, especially if you have to set aside 60 percent or  more of your monthly savings in a SIP, just for this. She proposes a mix of one's own funds, loans, and scholarships to meet the expenses.

Suraj Rao, one of Billimoria’s clients, tells us that he had to cut back on his love for cars. Rao has had to plan for his two daughters’ foreign education. His elder daughter, 20, is studying neuro-science at the University of Illinois, Urbana–Champaign. Although Rao didn’t need to dip into his savings much as the  income from his consulting business has been enough to pay the bills so far, he says children can take up part-time jobs while studying abroad.

“An internship is a good option. It’s a trade-off; parents can either take care of all expenses so the child can completely focus on her grades, or kids can take up internships to meet some of their  expenses, without impacting their grades,” he explained.

Then, there are unplanned expenses, like travelling for job interviews or eating out with friends, which can add up to quite a  bit. "The average cup of coffee in New York costs about $6 to $7 (Rs 500-584)," says Dubey.

Mohit Satyanand, a Delhi-based stock markets investor whose son, Kedar, completed his bachelor's in economics, at Northwestern University, Illinois, US, in 2020 says that often, students find it hard to adjust when studying abroad. “Some parents go there and live with their children for a few months to help them adjust, which is an unplanned expense, and can be quite hefty,” says Satyanand.

Where to invest

Dubey and most other financial planners suggest investing in equity mutual funds as soon as you decide to educate your child abroad. “Your own investments, topped up by loans if you need them, and then scholarships if you are eligible; that’s the pyramid you should be looking at,” says Dubey.

Also read: Worried about which mutual funds you should choose to plan for your child's financial future. Here's our MC30 list of curated funds

Diversified equity funds have given an average 10-year return of 14 percent over the past 20 years. Debt funds have given an average 10-year return of 7.33 percent over the past 20 years. “Ideally, parents should start planning as soon as the child is born, or just a few years after that, to derive the maximum benefit from  compounding. Besides equity, even hybrid funds are good to plan for your child’s education,” says Tarun Birani, Founder and CEO,  TBNG Capital Advisors. Ashish Chadha, a registered investment advisor based in Gurugram, strongly recommends foreign mutual fund schemes. He says he was one of the early investors even in US-focused bond schemes launched by a few mutual funds in India. International schemes, he adds, helps you leverage against the Rupee's depreciation.