Planning for kids college education (Part 1)
Planning for kids college education (Part-I )
As a financial planner, I have helped several families in planning for their kids’ college education.
There are some pitfalls, unique challenges in planning for a kid’s education as opposed to retirement. This article’s objective is to highlight some of those important issues.
Most of the Indian parents when asked to identify the highest priority item among their financial goals, would identify college education savings as the highest priority item. Not only among Indians, but among other Asian communities too, Kids college education has been a very important objective.
It isn’t that that the investors living in Western countries don’t care about their kids’ education. A higher percentage of them choose retirement over college education as their number one priority.
I strongly believe all parents love their kids. Asians parents are no way better than Western parents when it comes to love. In those countries, getting scholarships, financial aids, grants, and loans are easier and provide alternate ways to fund a kid’s education. Obviously no one offer grants or loans for retirement. And these financial options have an impact on prioritizing one goal over other.
Hence how you prioritize your kid’s college education over your own retirement accounting is your prerogative; Nevertheless, you must have a plan in place for funding.
Let us discuss the pitfalls and challenges one by one.
1. (Under) Estimating College expenses:
Many investors while planning for college education only look at tuition fees and ignore several other costs associated with education which are unavoidable.
- Tuition & Fees ( Tuition and fees are the price you pay for taking classes at your college.)
- Room and Board (Colleges usually offer a variety of dorm-room options and meal plans to students who live on campus.)
- Books and Supplies ( Books, stationary and course materials )
- Personal Expenses (includes laundry, cell phone bills, eating out, internet )
- Transportation (Whether you commute to campus to see them or they take trip home, you’ll have transportation costs. Of course, these will vary depending on mode of travel and how often.)
If you look at the list you will easily recognize the cost of item#2 to #4 is not negligible and need to be considered while budgeting for college education. Please make sure your financial planner included these expenses while planning.
US College Education costs (2013)
|4 year Private||42,200|
|4 year Public (out of state)||34,000|
|4 year Public (in state)||21,500|
|2 year Private||28,200|
|2 year Public||15,300|
Source : collegeboard.com
2. Assuming wrong inflation rate
In recent years, USA college fees have been rising about 5% to 7% a year. At 5% a year, prices double in about 15 years; at 7%, they double in just over 10. While the historical (CPI) inflation rate of USA is between 3% to 4%. Education inflation is always higher by 4% or more.
In India WPI inflation is widely published and used for planning. Some planners use this rate for financial planning. This is incorrect in my opinion. WPI represents Whole sale price index. Consumer prices follow higher inflation rate due to various reasons. India due to resource constraints not able to get proper CPI figures. Education is more of a service than product, hence service costs are going up faster than cost of the basket of goods. Hence Education inflation is much much higher than CPI inflation figures. Check the ground realities how the college costs have changed in India and compare that to CPI figure. You will see my point.
Since WPI is around 6-7% historically, I think CPI would be around 9-10%. Hence Education inflation rate should be 10-12% in India. I use 10% figure. And for some clients who want me to use very safe projections, I used 12%. I arrived at this figure, partly from what I have seen from increases in college costs in India. To find a suitable figure for your own portfolio, decide your target college/University and start tracking changes in its costs year by year. This should be more accurate.
1-June-2013: In April 2013, the WPI shows just 4.89% inflation, while the CPI shows 9.39%.