Harsh is working in a bank since last five years. He now wants to pursue a post graduate course in management so that his career will benefit in future. Harsh has always been careful with his money and has avoided spending too much or getting into any debt. Over the past five years, he has accumulated Savings In your Employees Provident Fund, Bank Deposit, NPS and a PPF account. He is considering to use these savings for his education, so that he does not have to take any money loan at high interest rate. Harsh believes that he will be able to replace them Investment he is using from now on higher income He’ll probably get it again after getting hired. Has Harsh considered all options and made the right decision on funding his higher education?

Harsh has certainly done well to save money in his first professional stint. For his plans for higher education, he has the option to finance it either by redeeming his existing investments or by taking loans. If the loan is being taken for consumption then it is good to avoid debt. But in this case, the loan will be used to hone Harsha’s skills, which will help him generate higher income and savings and build wealth in the future. Hence, he can utilize his investments, take an education loan, or consider a loan against his current investment.

All the investment options Harsh has chosen are long term, which will increase in value over time. Weaning them early will reduce this benefit. Some of the products they choose are also inflexible in their context redemption, Both NPS and PPF cannot be withdrawn within five years of the contribution Harsh has made for the purpose. His choice of investment correlates poorly with his immediate goal of funding his education. Bank deposits may be the only efficient option to partially fund their education. He should not touch the rest of his investments.

In these circumstances, taking an education loan for Harsh can be a good option. The loan requires a guarantor but comes with attractive terms and needs to be repaid only after Harsh completes his education. This means that he will be able to repay the loan once he starts earning again. However, if he uses his investments as collateral, the rate of interest will be higher than that, by the time he completes his studies, his investment in PPF and NPS may qualify for the loan. He can then consider restructuring his loans by taking low cost loans against his investments and prepaying high cost education loans. An investment portfolio that is not designed in line with a financial goal may thus be turned to restructuring loans taken to meet the target.

Content on this page is courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.