The trouble with fixing the current cost of a child’s education

Published: November 12, 2015 at 5:44 pm

Last Updated on

The most important input while planning for a financial goal is the current cost of the future expenditure. When the goal is several years away, the current cost is a crude estimate.  For retirement, we can assume present lifestyle barring child’s education expenses and liabilities. For a Ferrari, we can enter the current cost. For a world tour, we can enter the current cost. What current cost would be enter for our child’s education goal? The other goals are for us so we can make a reasonable estimate of what we want.

When our child(ren) are years away from college and have no idea what they are going to do with themselves, what current cost could we enter? That is the  trouble with fixing the current cost of a child’s education.

The current costs of any financial goal can change from year to year. For example, due to ailment the monthly medical expenses can shoot up and this would affect the retirement goal and amount we need to put away for it. This is why a financial goal planner should be used one a year, every year.

Child’s education goal is problematic. The child’s desires can change widly as he/she nears school graduation. This could be because of developing individuality or peer pressure.  Our estimates of the current cost of a child’s education can be significantly off as the child grows older.

Easier said than done, but we need to put our retirement planning first in the list of priorities at all times. So if X is the monthly investible surplus, and Y is the amount needed for retirement planning, at least 80% of Y should be allocated for retirement from Y.

Only the remaining (X-Y or at least X-80% of Y) can be spared for all other goals. Suppose my son is 2 years old and about 15 years away from college.

I can invest 60% in equity (12% returns expected) and 40% in fixed income (7% return post-tax).

Therefore the net portfolio return expected is  (60% X 12%) + (40% X 7%) = 10%.

Inflation in cost of a child’s education: 10% (minimum). If you use more, you need to invest more. It is Diwali season, so let us no get depressed worried about actual inflation in education costs.

I invest (X-Y) each month for 15 years with a 10% return expectation. The corpus that I calculate

C = 12 * (X-Y) * ((1+10%)^15-1)/10%

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

is my current cost of my child’s education. You can use this Financial Goal Planner with Flexible Asset Allocation to plan and calculate for all financial goals.

Since income should increase each year (hopefully!), so should (X-Y). This can be factored in the above planner.

The main point of this post is, even those my son is only two years old, I set the current cost of my childs education now itself. This would be reviewed once a year, but I do not expect C to change dramatically.

This C is the amount that I would spend from my pocket to fund my child’s education. If my child aspires for something more expensive and/or if I am not wrong in my estimate of inflation (hopefully not return!), then the extra cost will be covered with an education loan. Related guest post: Paying off Education Loan in India

I cannot squash my child’s dreams by saying, “I can only afford this much’. At the same time, I cannot throw a spanner in my retirement plan and dip into it to make up for the shortfall.

This is of course for a normal, responsible child. If my child turns out to be a loafer who is not capable of putting in the necessary effort to match up to his aspirations, it would be a crazy idea to get him an education loan. So we will have to play it by the ear. Easier said than done.

Which is why I believe one should think hard before having a second child.  Read more: Some Tough Personal Finance Related Questions

The danger with the education loan is the kind of salary that the child would get after graduation. That should be enough to start paying off the loan asap. Otherwise, I will have to pay the EMI. If I am still in service, perhaps that is not a big problem. If I am retired by then, my retirement plan could go for a toss.

Planning for a child’s education is not easy. As the child grows, we can discuss career options and suitably adjust the current cost to some extent as long as it is not too close to school graduation.  Then there is the performance in the board exams, entrance exams, quality of college education (see below), reservations,  our emotions, what the spouse has to say at that time (aka peace or lack thereof in the family) etc. Scary!


Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel


This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)  

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Leave a Reply

Your email address will not be published. Required fields are marked *