highnetworth:


Further education overseas – worth it from a financial perspective?
April 16, 2007, 2:51 am
Filed under: Education, Malaysia, Salaries

Talk to any Malaysian parent and the conversation will inevitably come to the topic of their children’s education. To many Malaysians, sending their children abroad for their degree is something which many aspire to. The reasons for doing so vary from parent to parent, with some saying that they want to give their children the opportunities they never had, while others claim that the difference in quality of education plays a prominent role.

Perhaps the truth is more sinister. Sometimes I cannot help but feel that a sizable percentage of Malaysian parents are sending their children overseas with the sole aim of keeping with the Joneses, something I like to call “An Asian manifestation of the conspicuous consumption phenomenon”.

Yes, some Malaysian parents would go to great lengths such as selling their house and turning to loan sharks for the sake of their children’s education. These are the sacrifices we make in the name of our so-called “Asian values”. But are people really that altruistic? Are parents really willing to sacrifice everything for their children? What happens if we take the slightly cynical (but more realistic!) view that humans are innately selfish, and that there’s a little social status aspect in all of this?

Of course, there’s nothing wrong with sending children abroad, if you can afford it. Even if we admit that part of it is due to peer pressure from other, well-to-do parents, in the end, the children end up benefiting in the sense that it is in their best interests to allow their parents to finance their studies abroad. This might not be true, for example, if parents chose to spend the money on a bigger car instead.

But, what if the choice wasn’t between their children’s education and a car? What if the choice was between, say, their children’s education and an investment of RM270,000 in a condominium unit for rental purposes? Because that’s roughly the cost of sending a child on a 3-year degree in an average British city (excluding London).

Parents should discard their emotions and approach this issue from a financial perspective. A common tool used by financial planners is to consider the “net present value”, or NPV of their investment. In this case, we calculate the cash flows from their investment (in this case, the RM270,000 spent on their children’s education) and compare it to the next best alternative (investing the RM270,000 on two condominium units).

Anecdotal evidence* tells me that 2 in 10 overseas Malaysian students get overseas job offers after completing their Bachelor degrees. Another three opt for a Masters, PhD or professional studies. The other 5 thankfully are bright enough to find local jobs in Malaysia and do not contribute to our unemployment problem.

We assume that (you can skip these next few parts if you’re not interested in our assumptions but just want to know the results):
(i) The inflation rate is 4% a year.

(ii) Those working overseas earn RM125,000 a year after tax with a salary increase of 4% a year thereafter. (i.e. no increase in salary in real terms). Rents & unavoidable expenses are RM42,000 a year. We assume the child will work for 40 years before retiring. Note: For comparison, the average graduate salary in the U.K is GBP22,000 or about RM154,000 a year. Assuming a marginal tax rate of around 30%, this is approximately RM107,800 after tax.

(iii) Those working in Malaysia earn RM20,700 a year after tax with a salary increase of 4% a year thereafter. (i.e. no increase in salary in real terms). Rents & unavoidable expenses are RM4,800 a year. We assume the child will work for 40 years before retiring. Note: For comparison, the average graduate salary in Malaysia is about RM1,800 per month or about RM21,600 a year. Assuming a marginal tax rate of 25%, this is approximately RM16,200 after tax.

(iv) Those who opt for Masters, PhD or professional studies will have to pay an extra RM100,000 per year for another 2 years of education, after which they will have the same problem of finding a job. Again, anecdotal evidence suggests that 6 out of 10 get overseas jobs whilst 4 out of 10 get local jobs. We assume that their salaries are the same as counterparts with only a degree (which is not that unreasonable).

(v) We assume that sending your child to a local university will allow him to obtain a local job with 92% chance and will cause him to be unemployed with an 8% chance. The pay for a local job is the same as above and he will also work for 40 years before retiring. Note: This is close to the actual unemployment rate in Malaysia.

(vi) The cost of local university education is RM20,000. Hence the total amount to be invested in the condominium would be RM270,000 – RM20,000 = RM250,000. The long term rate of return for the condominium is 7.5% a year compounded continuously, including rents, expenses, maintenance, capital gains, and taxes. Note: This is a very reasonable rate of return, considering the after tax rate of return for low risk funds like Amanah Saham Nasional is around 6.8%.

OK, all the boring stuff are over, onto the results!

Overseas studies:

  Overseas Job Postgraduate Local Job Total
Probability 0.2 0.3 0.5  
After tax income (yearly) 125,000   20,700  
Rent (yearly) -42,000   -4,800  
After tax income – rent (yearly) 83,000   15,900  
After tax income – rent (lifetime) 3,320,000 1,542,867 636,000  
Expected after tax income (lifetime) 664,000 462,860 318,000 1,444,860
         
         
If opts for postgraduate studies;        
Probability 0.6   0.4  
After tax income – rent (yearly) 83,000   15,900  
After tax income – rent (lifetime) 3,320,000   636,000  
Expected after tax income 1,992,000   254,400 2,246,400
Cost of postgraduate studies       703,533
Expected after tax income minus cost       1,542,867

Local studies:

  Local Job Unemployed  
Probability 0.92 0.08  
After tax income – rent (yearly) 15,900 0  
After tax income – rent (lifetime) 636,000 0  
Expected after tax income (lifetime) 585,120 0 585,120
       
RM250,000 saved   270,000  
Cost of local education   -20,000  
Net amount saved   250,000  
Net amount saved invested at     939,604
compound interest rate of 7.5% yearly,      
assuming inflation of 4% yearly      
Total     1,524,724

I’ve got the excel spreadsheet with me, but WordPress is not allowing me to upload it. Anyway, the result here is what is important:

The net present value of sending your child overseas is only RM1.4 million vs RM1.5 million if you don’t!

But wait, you say. Don’t most parents who send their children overseas are able to afford it anyway? Who cares if the difference is only a hundred thousand?

Not quite. Various pieces of anecdotal evidence which I’ve collected tells a very interesting story. For example, my mum tells me that one of her salespeople, a man in his late 40s who earns around RM2,500 per month, has sent his eldest son to study medicine in Russia. Admittedly, Russia isn’t the most expensive place to study in, but sources indicate that pre-med tuition fees alone cost USD$2,500. For the actual degree, it’s USD$3,600 a year for 6 years. For dentistry, a stratospheric USD$4,600 a year. That’s more than half a year’s salary.

But that’s not all. Because of the eldest son’s lack of knowlege about personal finance (thanks to our lousy schools) he managed to rack up around RM1,000 monthly in credit card debts due to mobile phone use and other excessive spending habits.

My mom tells me that this salesperson always comes to work everyday with a very sad face, like he’s carrying the burden of all of mankind’s sins.

That’s not all. Our neighbour’s son failed to complete his studies in Australia, costing his parents hundreds of thousands of ringgit with nothing to show at the end of it.

Before sending your child abroad, please teach him/her proper financial planning skills and assess his/her personality first. It’s highly unlikely that he will change from being a naughty boy to a good boy. If anything, it will probably be the other way round.

I speak from personal experience.

*Based on my very unscientific methodology of asking people I know

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8 Comments so far
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[…] Ahmad Ismail wrote: Talk to any Malaysian parent and the conversation will inevitably come to the topic of their children’s education. To many Malaysians, sending their children abroad for their degree is something which many aspire to. The reasons for doing so vary from parent to parent, with some saying that they want to give their children the opportunities they never had, while others claim that the difference in quality of education plays a prominent role. […]

Pingback by Overseas Education - Worth It?–mamakk!!!

An interesting insight indeed. But the comparison is viable only when you see it in financial terms. Many parents are willing to sacrifice out of love for their children, not because of the future financial gains from the so-called investment of their children overseas education. Besides, the lifetime experiences gained during studies abroad will be invaluable and priceless.

Comment by Ken

I personally think that the above calculation is too simplistic.

1. If the student opted to work for 40 years oversea, then RM3,320,000 well over RM 1,524,724 earn for those studying locally. and there are possiblity of student working oversea for several years and work locally for several years. the writer did not take into account of this.

2. Secondly, the return of 939,604 from investment is not justified. If without taking into account 4% inflation rate, it will be 250,000 x 7.5% x 40 =750,000. if 4% taken into account, then it would be 250k x 3.5% x 40= 350, 000. No way of calculation ends up with 939,604.

3. thirdly, assuming the postdoc/master earning the same as graduate wif first degree (as assumed by writer), the post doc/master will work for fewer years as 2-4 years have been spent on postgraduate studies…and obviously will earn less for the lifetime.

4. the oversea student working overseas will earn more yearly than the local student working locally + condo investment. with the extra money earnt every year, some amount can be spared for investment at the same time. if so, the expected income for oversea student working oversea will be much more than the 1.4 million as projected, purely from salary pay.

Just think that the calculaton is too simplistic. obviously there are more factors to consider.

Comment by Oversea student

The fact is anyone (yes, ANYONE) can afford to study overseas if they have sufficient English, airfare, three months spending money and about MYR$20,000 for fees. If you have an HSC, speak English and want to migrate, come to Australia and do a 2 year course (take your pick: hairdressing,chef, accounting, etc) and you can live here permanently. Most courses are in the evenings so that you can legally work 20 hours per week to pay your expenses, etc. The Immigration Dept takes into account that work experience (yes, true) when qualifying you for PR. Once you get PR the Govt gives MYR$20,000 when you buy your first home, you get medicare (free of charge)if you are ill and want to visit a (private) doctor who ‘bulk bills’ (more than 60% do) or are admitted to hospital. After 2 year as PR, you can get welfare from Govt if you got no job. (No need to pay back. But most Malaysians are too clever and too proud to depend on that. But it is available). Then as PR you have same rights as citizens to go to university (paying a very low fee). You could also be entitled to ‘Austudy’ payments to help you along. After 4 years as PR you can get citizenship, vote the bastards in and moremportant vote the bastards OUT! (Try that in Malaysia). Send a brief email to ‘easymigration@iprimus.com.au’ for a free assessment if you are interested.

Comment by Goodman

thanks for the good estimations and calculations :)

unfortunately, dollar-to-dollar, overseas have better spending power than we do here.

ie. if u earn USD 1,800 – it costs USD 3 to buy a Starbucks in USA
but if u earn RM 1,800 – it costs RM 14 to buy a Starbucks in Msia

another example:
a Honda Civic is USD 15,000 in USA
the same model but with less features costs RM 124,000 in Msia

ie. Msia’ns have to become slaves to a bank for 9 donkey years just to get around town because the public transport is poor and disconnected

Comment by accountability

The perspective presented is solely from “the parents’ point of views” on the returns of their ‘investments’. Surely to the parents the analysis above may indicate no difference (however some assumptions used in the analysis are too simplistic – I will explain later), as their initial investments would return roughly the same NPV. However, it is the form of investment returns that makes the difference.

In the case of a local grad, the child will have much less earning incomes ($585120 lifetime while the parents still enjoys $939,604), while an overseas grad could earn much more ($1,444,860 lifetime). Is this not a clear advantage of an overseas education in its earning power? Of course to the parents, the percentage of the incomes earned on the fees paid is a big difference (>29x returns on $20,000 local fees compared to just >5x returns on overseas $270,000 fees). However, if we shift the perspective down one level to the children’s level, i.e., we ignore the need for good returns on investments and focus solely on the real money that can be earned from salary, then things start to get interesting – where would you rather wish you parents send you to (assuming your have a choice) – a local uni or an overseas uni? As parents, especially Asian parents, we (I am a parents of two) would rather sacrifice for the goods of our children, and sending our children overseas in the hope that their have a better education and future is exactly the motive in the first place (at least that’s true for my parents) and the better earning power (from the analysis) of an overseas education proves this!

As a current overseas PhD student, I do not agree that parents still have to be responsible for paying RM100,000 a year for their children’s Masters/PhD. Once you have a Bachelor, chances are you are likely to work overseas, and apply for permanent residency (PR), and if you are lucky to be granted one, you pay only domestic fees (and there are many tangible and intangible benefits associated with being a PR as well). This is your own responsibility and not your parents’ anymore! Furthermore, Masters and especially PhD are usually funded by Scholarships, which include fees and living stipends, so you and your parents need not pay anymore money, barring of course the opportunity cost lost had you entered the workforce and start earning right away. So the RM703,533 used above for paying for an overseas Masters/PhD is way beyond acceptable. Furthermore, won’t any local grad considers doing Masters/PhDs study as well, albeit at local Unis?

Also, assuming a Masters/PhD holder to earn the same as a Bachelor holder is not very realistic. Recent news reported that Masters earn substantially more than Bachelor, although a PhD, due to the specific nature of its expertise, may not earn as much as a Masters (I know – it’s shocking for me!).

To sum it up: an overseas education – $270,000, lifetime incomes after that – $1,444,860, the EXPERIENCE – priceless!

Comment by Overseas PhD

accountability: I hate those Starbucks comparisons, it is as if all people do with their money is drink Starbucks. Take rent for example. I’m in Singapore, where Starbucks is around $5 compared to around RM12 in KL.

But now I’m apartment-hunting, where the lowest rent I’ve found for a 4 room flat, without conversion, can rent me an entire terrace house in Subang Jaya or Petaling Jaya. And of course, with that house, you can sublet more. Or if you want to rent a flat in Malaysia, it is drastically cheaper than Singapore.

Considering rent takes up more than half my money each month, I much rather suffer RM12 Starbucks.

Comment by Rajan R




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