Take loan for tax benefits: Funding child education
May, 23rd 2011
While everybody wants their child to have a good education, Indian parents are especially intent on achieving this goal. So focused are they that they are willing to scrounge on basic indulgences to save for their kids' college fees.
The problem is that in their efforts to fulfil the needs of the child, they sometimes sacrifice more than they should. They dip into their retirement funds to pay for the education. This is a dangerous strategy because it leaves them financially vulnerable in their sunset years.
We all know that the cost of higher education is rising at a fast pace. Unless you foresaw this trend 10-12 years ago and started investing aggressively for this goal, your savings alone might not be enough to fund your child's higher education.
Instead of withdrawing from your Provident Fund or PPF, it's better to bridge the gap with an education loan. It is not only tax-efficient, but helps inculcate financial discipline in the child by making him responsible in his early working years.
It may be argued that taking a loan in these times of high interest rates is not a prudent strategy. You will be paying 12-14% on the loan, while your investments earn only 8-8.5%. However, keep in mind that any loan taken to pay for the education of your child is eligible for income tax benefits.