How To Save For Retirement While Funding Children’s Education Overseas?

To what extent would you go to fund your children’s education overseas? According to a recent report, 90 per cent of Indian parents say they intend to fund their child’s education abroad, even though the cost could represent up to 64 per cent of their required retirement savings. The data poses a significant dilemma: How can we prioritise both goals without jeopardising either?

A growing number of Indian parents are sending their children to study overseas. However, HSBC’s recent ‘Quality of Life Report 2024’ reveals that they could also compromise their financial future to fund their children’s international education.

Growing Cost of Overseas Education

According to the report, over 2 million Indian students are expected to study abroad by 2025. However, as costs continue to increase with the rising inflation, funding is becoming a cause of worry for parents.

The data suggests that the cost of international schooling for a 3-4 year degree programme in popular overseas study destinations such as the US and UK can deplete up to 64 per cent of Indian parents’ retirement savings.

The report surveyed over 11,000 affluent respondents in 11 markets around the world. It was found that only 53 per cent of affluent parents in India have an education saving plan, while 40 per cent expect their child to take on student loans. Around 51 per cent are hopeful for scholarships, and 27 per cent say they would even consider selling assets to fund their child’s education.

The Retirement Savings Gap

Depleting retirement savings to fund education can leave retirees vulnerable, especially in the absence of a robust social security system in India. As life expectancy increases, the need for a steady retirement corpus is more critical than ever.

According to the report, the top five concerns of affluent individuals globally are rising cost of living, high inflation, physical health issues, higher healthcare costs and inability to save enough for a comfortable retirement. These concerns are reflected in the financial priorities of India’s affluent, wherein the respondents ranked the following as their top financial goals:

- Supporting family financially: 45 per cent

- Gaining wealth for financial security: 41 per cent

- Investing in properties: 40 per cent

- Education savings for their children: 40 per cent

- Planning for retirement: 38 per cent

How can parents allocate savings between their children’s education and retirement if they start saving later?

Says Kai Zhang, Head of Wealth and Personal Banking, South and Southeast Asia, HSBC, “A well-prepared budget is the foundation of a successful overseas education. By planning early and instilling financial knowledge in our children, we empower them to navigate the complexities of life away from home while ensuring their well-being and security.”

1. Create A Realistic Budget: It is imperative to plan a budget that considers all expenses related to your child’s education overseas, such as tuition, accommodation, living costs, and travel. This would provide a more realistic picture of overall expenses and payment timings to help plan savings, payments, and cash flow before and during overseas study.

2. Seek Expert Advice: For families navigating the complexities of funding international education for the first time, it would be prudent to consult with financial advisors or educational consultants even as early as ten years before application and enrolment. “Parents can balance savings for children’s education and retirement by prioritising goals. Regularly reviewing financial plans with professionals can help optimise savings and investment strategies, ensuring both education and retirement needs are effectively met,” Zhang states.

3. Teach Your Children Basics of Finance: Instilling financial responsibility early on is essential to preparing children to thrive independently. Opening a bank account before moving abroad and having a debit and/or credit card on hand will not only provide financial peace of mind but, more importantly, can teach personal finance basics such as saving, smart spending, and setting financial goals.

Should parents take an education loan to alleviate the pressure on retirement funds?

“The decision to take a loan varies based on the financial needs of the individuals and families. For those who want to opt for an education loan, it can alleviate pressure on retirement funds by providing immediate financial support for college expenses,” Zhang states.

However, She adds, “Evaluating borrowing cost versus savings growth and considering long-term retirement needs will help strike a balance between funding children’s education and securing financial stability for retirement.”

When assessing loans, parents should:

1. Compare interest rates: Education loan interest rates are typically lower than personal loans and are often tax-deductible under Section 80E of the Income Tax Act. Compare the loan interest rate if you are taking it from an NBFC to that of a traditional bank.

2. Evaluate repayment terms: Some loans allow deferred payments until the child graduates, ensuring the child contributes toward repayment once employed. Always check the fine print before taking such loans, and know all your repayment options.

3. Weigh loan terms against savings: Loans offer the flexibility of spreading costs over time, while savings might deplete future financial security. Parents can consider loans for some of the expenses, especially if their savings are insufficient to cover both goals.

Every person has a unique financial situation to handle, so choosing what is best for you and your child’s future should be based on practical goals and not on emotional expectations.