Should you use retirement funds for higher education of your child?

Most nuclear families nowadays have one or at the maximum two kids. Education, especially good quality higher education, is very costly. If a child aspires to study abroad, then it enters into an even higher orbit The expenses are beyond the reach of most middle-class Indian families. In this context, it becomes a tough task for most Indian households to fund their child’s education.??

The cost of education is bound to go up and, in some cases, it may go well beyond what was anticipated, as some of the new courses introduced are far beyond what households anticipate.?

Many times, households are confronted with a situation of dipping into their retirement savings for funding their child’s education. Sometimes, the family has kept aside some corpus for the child’s education and it falls short of the required sum. In some cases, there is no provision as such for a child's education. And there is a third situation: An investor has forgotten to liquidate her investments in risky assets such as equities and the markets have tanked at the time of paying for the child’s education, and now, the expense cannot be postponed.?

While the first two situations of inadequate funding are clear situations of crises, dipping into the retirement funds may not be a great idea.??

Retirement funding vehicles such as employee provident fund (EPF) allows withdrawal for the purpose of paying for child’s education, among other reasons. However, that is not recommended. Funds earmarked for retirement, should ideally be used for those golden years. Remember, no one extends a loan to live through golden years?

However, there are many education loan products available. Some education loans insist on funding only UICTE approved courses. Some loan products also fund courses otherwise. There are some lenders who insist on a collateral owned by either the student or the parent; and some do not. Picking the right education loan product can solve the problem. These loans usually come with a moratorium period of one year after the completion of course, and a repayment term of up to seven years. So, the borrower usually does not get burdened with the repayment of the education loan. Interest paid on the education loan also brings in tax deduction.?

Opting for an education loan, also has a non-financial impact. The kid realises her responsibility and, in many cases, gets the financial acts right after the course is over. In case the kid takes time to take up a job, or has an income less than adequate to service the education loan and live life comfortably, then the parents can always chip in for a short period. This is a better alternative than pulling out the retirement funds to pay for the course fee.?

Now, let’s turn to the third situation wherein the parents have money but due to some temporary factor such as the bear market are running short of money. In such a case, it makes sense to speak with an investment advisor If an equity portfolio is diversified across sectors and professionally managed, then it is more likely to bounce back. In such cases, it makes sense to dip into some other savings to pay for the education. Once the markets bounce back, the equity portfolio earmarked for the child’s education can be renamed as retirement savings.?

If the money meant for education is stuck in some of the traditional avenues such as PPF in the name of the child or the Sukanya Samriddhi Yojana, then the parents have to look for stop gap arrangement. In such circumstances, it may be smart to opt for a loan against securities. Instead of selling mutual funds, it makes sense to borrow against them. For example, if the money proceeds are expected from a traditional investment in six months, then borrowing costs for those six months will be much less than the tax payable on the profits booked on mutual fund units sold, in many cases.?

Depending on the situation and available corpus on hand, the household should take an informed decision. Always, as a good practice, move money from risky assets to less risky ones such as fixed deposits and debt funds at least two years before the due date of the financial goals. And avoid touching retirement funds. So, availing education loans prudently can make life simpler.

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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.

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