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“Hey Niraj, am back to seek your help again” said Uncle Shrikant to his nephew Niraj Desai.

“Completely my pleasure uncle, please tell me, how can I be of help to you.” Said Niraj

Shrikant: As you know, my younger son, Aakash is going for MBA to Australia.

Niraj: That’s great! Congratulations

Shrikant: Please hold on! The problem starts here. I had taken a child plan for Aakash in 1991 for a sum assured of Rs. 1 Lakh. The plan matured last December and I received a maturity value of Rs. 2.05 Lakhs. However, his course fees is more than Rs. 20 Lakhs. I am not able to understand what to do? I don’t want him to start off his career with a loan. Thus, I was thinking of using some of my retirement money to fund his education.

Niraj: Do you think you should do so?

Shrikant: I don’t know, that’s why I have come to seek your help.

Niraj: Well, in my opinion, he should take an education loan and you should not use your retirement funds because of following reasons:

1. First thing, education loan is a low cost loan. So effectively we will be availing money at a lower cost and thus invest your retirement money at relatively higher return avenues.

2. Even if both the interests are almost the same, we need to understand that Aakash can get an educational loan and has a lifetime to repay it. However, you won’t get a loan for retirement, and at this age, you can’t be going in for risky investments as well.

3. The Education loan repayment would have 2 benefits for Aakash. The interest payment would give him a tax break u/s 80E. Also, it will instill a habit of spending less from day 1 of earning. For example, after MBA if he gets a  job with a take home salary of Rs. 85,000 p.m. and has to pay an EMI of Rs. 40,000 towards his Education loan, then he will learn to live with the balance salary of Rs. 45,000 p.m. Thus, when his loan is repaid, this excess of Rs. 40,000 can be used in saving for his kids and retirement.

On the other hand, if there is no loan, he will be tempted to spend more from his salary, as he won’t have any major responsibilities. It will later be difficult for him to spend less and save for future.

Shrikant: You sound pretty logical. But I must say, your generation has a totally different mindset. Our generation always believed in living a debt-free life.

Niraj: Even we do uncle. We would love to have a debt-free life. But when the resources are limited, then the choice has to be made, between whether to take the responsibility on ourselves or whether to risk the retirement of parents.

Shrikant (getting little emotional): You are absolutely right Niraj. But I must say, I really feel bad that because of my lack of planning, today my son has to take a loan for his education. Ideally, I should have planned well to fund his education. In fact, I did that. But due to my conservative nature, and belief in traditional endowment plans, I could not match inflation. Any ideas so which Aakash can follow, so that his children don’t have to take educational loan.

Niraj (smiles): I would suggest that when he starts earning, he should plan for both, his retirement as well as for his children’s future separately. Also, he should take into account inflation of 6-7% and invest into assets which give him returns over and above inflation. Lastly, not to chase plans having names “retirement plans” or “child plans”. Most companies are selling expensive insurance-cum-investment plans and looting investors under the disguise of planning for their children or retirement.

Shrikant: Times have changed. We all need to change according to time. Thanks for changing my thinking, Niraj.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical)

Category Income Tax, Other Articles by - Prof. Bajaj