You may be required to financially assist your children well past their undergraduate education! Why? And how can you support your child in such a situation?

Beyond under-graduation The cost of college education typically increases in excess of 10 per cent per annum. Income for undergraduates entering the workforce does not, however, keep pace with inflation.

Chances are your child gets a low-paying, unsatisfactory job. He/she may, therefore, feel the need to enroll for a graduate (master’s) programme.

Now, a graduate-level programme can improve your child’s chances of getting a better job, but may require you to borrow money to finance the cost. Repaying the loan may come at the cost of saving for your retirement.

Alternatively, your child may take a student loan, but this means having to enter the workforce with a large debt burden. The problem also extends beyond getting a job. If your child was to lose the job, there is the student loan to repay besides the need to pay for living expenses.

Assuming you want to assist your child till he/she becomes financially independent, what should you do to prepare yourself for in such an exigency?

Providing support

You can create a “beyond education account” and set aside money in the event you have to financially assist your child into his/her late 20s. Of course, this savings has to come from your current income. Your contribution to retirement savings will reduce proportionately. Therefore, any balance in the “beyond education account” should be transferred to your retirement account after your child becomes financially independent. Your investment strategy for this account should be similar to that of your child’s education account.

If you are unable to set aside enough money, consider taking a loan with your house or property as collateral. You can encourage your child to contribute toward the loan repayment. You can also use a combination of a loan and the “beyond education account” to make ends meet.

Finally, you can transfer money from an investment account attached to a lower-priority life goal to the “beyond education” account. You may have to give up that lower-priority goal or postpone your goals to a later date. You cannot take care of all financial contingencies. But you could reduce the stress on your cash flows or that of your child’s when he/she starts working.

So do not force your child to buy a house immediately after landing a job.

For one, you are converting your child’s human capital (the present value of his/her future income) into investment in a lumpy asset. For another, you are increasing your child’s stress to repay the loan.

The writer is the founder of Navera Consulting

Related Topics