How to fund child’s education: Take a loan or use own funds?

Keeping your accumulated savings invested and taking an education loan instead can benefit you. Photo: Alamy

Keeping your accumulated savings invested and taking an education loan instead can benefit you. Photo: Alamy

Any big-ticket spending requires you to either have the required funds in place or a financing option. When dealing with long-term financial goals, such as higher education of children, you have the advantage of planning much in advance. Here’s how you can go about the planning.

Start early

A lot of parents have an inclination to send their children abroad for higher education, at least at the post-graduate level, said Suresh Sadagopan, a certified financial planner and founder of Ladder 7 Financial Advisories. “In that case, the planning needs to start really early. They would need a horizon of at least 10-15 years. When we talk of international education at post-graduate level today, most likely it is not going to happen below ₹40 lakh,” he said.

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How do you work towards saving that amount? Prakash Praharaj, founder, Max Secure Financial Planners, said that the future cost of a particular course needs to be calculated taking into account at least 10% annual inflation. “Then calculate the current assets and investments accumulated for these goals. Then the remaining gap for the aimed amount is to be filled through monthly SIPs over the years,” he said.

Starting an SIP of ₹5,000-7,000 in an equity fund for 15 years and increasing it by 10-20% each year could help. However, Sadagopan said, given the fact that there are so many ongoing expenses these days, including other loans, it becomes difficult for parents to put aside a huge amount for the child’s post-graduation alone.

Consider taking loan

Even if you have been working on creating a higher education corpus, you need to consider taking an education loan. At present, the total expenses for higher education abroad could be in the range of ₹1 crore per child, Sadagopan said.

“A realistic thing that parents need to realise is that the child’s higher education is not their only goal. Retirement is also an important goal and they need to be aware of the fact that you can get a loan for all other requirements but not for retirement,” he said.

Own funds versus loan

But if someone has already accumulated the required amount, why should another repayment burden be taken on? The answer lies in two things, Praharaj said. “A cost benefit analysis suggests that taking an education loan and keeping the accumulated amount invested works in your favour. Moreover, it also helps in developing a sense of responsibility in the student. The realisation that a repayment has to be done by them keeps them focussed,” he said.

The math of keeping your accumulated savings invested and taking an education loan instead suggests that taking a loan results in significant benefits. For instance, if ₹1 crore is kept invested and an education loan for the same amount is taken, at the end of nine years, including the repayment holiday on the education loan, the net benefit could be around ₹87 lakh (see graph).

This includes the tax saved on repayment of loan. Borrowers of education loans can claim deduction on the interest paid, though not on the principal amount. Also, unlike in home loans, there is no limit to the amount that can be claimed as deduction.

Sadagopan said it is better that the parents keep the money with themselves and let the child take the loan. “In future if the child is struggling to find a job and pay back, you can step in to help at that point,” he said.


USDA Announces $150 Million Investment Fund for Rural Businesses

investment fund for rural businesses0

The U.S. Department of Agriculture has announced a $150 million fund the agency will use to invest in small rural businesses. The fund establishes a new Rural Business Investment Program with a new wrinkle for investment in rural ag-related companies.

The new investment fund was announced as part of the Obama administration’s “Made in Rural America” initiative. Agriculture Secretary Tom Vilsack said the money will go to “innovative” rural small businesses with an emphasis on those with job creating potential.

Vilsack told ABC News examples of such businesses might include small biotechnology firms, businesses creating ag-related products for export and regional food hubs. (So this isn’t necessarily money going to investment in small family farms here.)

Small agricultural businesses can already access funds through loans and loan guarantees from the USDA. But the agency says the  new fund will allow “cutting-edge” businesses to access equity investment funds, too.

In a statement announcing the fund, Vilsack said:

“One of USDA’s top priorities is to help reenergize the rural economy, and we now have a powerful new tool available to help achieve that goal. This new partnership will allow us to facilitate private investment in businesses working in bio-manufacturing, advanced energy production, local and regional food systems, improved farming technologies and other cutting-edge fields.”

The money will be managed by a private firm, Advantage Capital Partners, and will come from eight designated Farm Credit banks. These banks are part of the national Farm Credit System, a federally sponsored group of lenders to farmers and other ag-related businesses.

The money will be invested by the newly created privately owned USDA licensed Rural Business Investment Company.

Some critics are understandably skeptical of the “Made in Rural America” initiative. They say it promotes export of food items that the U.S. already imports in large quantity. Critics argue the initiative has also not really benefited small farmers, ag-related businesses or the consumer.

Journalist Brett Barth reports at The Cornucopia Institute blog:

“The prime beneficiaries of global trade aren’t farmers but corporate middlemen, the distributors, transporters, and traders who take a combined profit of over 90 percent of every food dollar. With such a large combined profit at stake, trade-for-the-sake-of-trade has become an economic engine that drives worldwide agribusiness to needless and illogical ends.”

Image: Wikipedia


Opportunity Fund Targets Minority Businesses, Loans More Than $60 Million in 2016

Small Business Opportunity Fund Loans Targets Minority Businesses, Loans More Than $60 Million in 2016

Small businesses in California that can’t access capital through traditional lenders have another option. Opportunity Fund is an organization that provides microloans to small businesses. Since it was founded in 1994, the organization has loaned more than $164 million to more than 5,500 businesses.

And in its 2016 fiscal year, Opportunity Fund provided over $60 million in loans, with a special focus on helping minority owned businesses, though that is not a requirement to obtain funding.

Small Business Opportunity Fund Loans

Anna Suarez, Small Business Marketing Director for Opportunity Fund said in an email interview with Small Business Trends, “Opportunity Fund’s philosophy is that small amounts of money and financial advice can help people make permanent and lasting change in their own lives, driving economic mobility and building stronger communities.”

David Anderson is one entrepreneur who has taken advantage of Opportunity Fund’s microloans. Anderson is the owner of Sage & Company, a business that sells household items like mops and cleaning equipment at events.

Anderson said in a phone interview with Small Business Trends, “When the recession hit, everything changed. The distribution channels like home shows where I sold products wouldn’t bring in as many people, but costs remained high. So it was difficult to keep up with inventory and other costs.”

So when Anderson heard about Opportunity Fund, he applied for a small loan and used it to build up his inventory so that he could have a more reliable supply of products.

Anderson also appreciated the ability to access a small amount of money. In the past, when he had tried to work with larger financial institutions, he said he actually had a more difficult time securing a small loan from banks that normally work in larger amounts. Opportunity Fund’s median loan size is $18,000.

And for some small businesses, securing any amount of money from traditional banks or lending institutions can be difficult or even impossible. But to work with Opportunity Fund, businesses just need to be located in California and be in business for at least a year with credit that is currently on time. Even if you have past credit issues or no credit history, Opportunity Fund will consider your loan.

Suarez says, “Most Opportunity Fund borrowers are unable to obtain funding from traditional financial institutions, so they seek an Opportunity Fund loan due to our specialization in affordable and responsible small business microloans and our understanding of their circumstances from having worked with thousands of similar borrowers.”

Image: Anderson with a customer at a home show


MF redemption process takes 1-3 days based on type of fund



I have lost a lot of money in stock trading in the past and so I am sceptical of mutual funds (MFs). How do I invest in MFs but still keep the risk at bay? I have a goal of my 5-year-old daughter’s higher education.

—Prakash Anthony

For a regular investor, MFs offer two advantages over direct stock market investing. One, they offer the facility of having your money managed by a financial expert in investing. Since the historical performances of MFs are transparently available, you can also compare fund managers and look at track records before investing.

Second, MFs offer diversification—the ability to invest in a variety of stocks with a relatively small amount of money. Diversification inherently lowers the risk of market investments since an investor’s money gets spread out among many more stocks compared to what individuals can afford by themselves. But it should be noted that while these two factors lower the risk of investing in the market, they do not eliminate the risk. Investing in equity MFs does carry risk. However, past market performances strongly indicate that the longer you stay invested in good funds, the higher is the likelihood of making handsome gains.

For your daughter’s education goal, which is still 10-12 years away, it will be good to have a portfolio with a good chunk, say, 75%, in equity funds. You can go for equity funds such as Franklin India Blue chip fund and Birla Sun life Frontline Equity fund.

How do you redeem an MF?

—Neha Sehwal

If the investment was made through an application form, for redeeming (withdrawing money from) an MF you would need to submit a redemption form, mentioning the folio number, scheme name and the amount of withdrawal. If it was done online, you would need to login into the platform and submit a digital request. Either way, the money will come to your bank account in 1-3 days depending on the type of fund. Liquid and money market funds are paid out in 1 business day, debt funds in 2 days, and domestic equity funds in 3 days.

I had made an MF investment in 2006 and have since moved cities. The bank account linked to that account is no longer active. I got a call from the MF about a dividend cheque. They have made it payable to my older account. What should I do?

—Raman Sen

You would need to write to the MF company citing the issue, and request them to change the bank account attached to the folio. You would need to provide proof of both the old and the new bank account (cancelled cheque or account statement).

You should also mention about the dividend outstanding. The MF will then process the change of bank request, and reprocess the dividend payout. Usually, it will happen in the form of a direct (electronic) deposit to your new bank account, and in some cases, a cheque will be reissued payable to your new account.