Here’s how to decide which student loan is best for you

14 Sep 2018 

As a prospective university student, I’ve recently started looking at loan options for my tertiary studies. One thing I realised from this “budgeting exercise” is that balancing my finances is a life skill that isn’t taught in school, and yet definitely an important one to master.  

If there is a university subject on managing personal finances, I’d probably enrol in Module 1: How to manage your first debt – the student loan.

Based on my own research, here’s my version of what the module would feature.

The student loan: Singapore edition

In Singapore, there are a few options for student loans, and I looked at two types of loans in particular – the CPF Education Scheme and the MOE Tuition Fee Loan Scheme. Here’s an overview of how they differ: 

Heres how to decide which student loan is best for you.png

CPF Education Scheme vs. MOE Tuition Fee Loan: Which one should you choose?
The first thing that to note is that interest for the CPF Education Scheme starts to accrue as soon as the Ordinary Account (OA) savings are withdrawn for the course of study, while the MOE Tuition Fee Loan Scheme is interest-free during your course of study.

I’ll break this down using a simple example.

Let’s take a loan quantum of $18,900, which is approximately 90% of the total course fee of a three-year degree course, or the maximum amount the MOE Tuition Fee Loan covers. 

(You have the option of borrowing 100% of your course fee under the CPF Education Scheme, but we’ll use 90% or $18,900 for the sake of making a fair comparison.)

Here’s a comparison of the loan amounts upon graduation:
Heres how to decide which student loan is best for you Graph1.png
* The interest rate is based on the average prime rates of the local banks. 4.75% p.a. is used in this example.

The loan amount under the CPF Education Scheme is greater because of the interest accrued during the course of study.

It is important to note that the length of your repayment period affects the final amount of your loan. Therefore, you will need to consider how much you intend to repay every month, and how long you hope to complete the repayment, in order to determine which of the two schemes is more affordable for you.

Read also: Education loan 101: Student loans in Singapore

How does your loan repayment period affect your loan repayment amount?
Let’s assume that you decide to make full repayment within two years from graduation at the monthly instalment of $840 each month. 

In this scenario, the CPF Education Scheme will cost about $500 more, making the MOE Tuition Fee Loan the more affordable option. 
Heres how to decide which student loan is best for you Graph2.png
However, let’s see what happens if you go for a longer repayment period.

If you choose to complete repayment six years from graduation at a monthly instalment of about $300, the CPF Education Scheme becomes the more affordable option. 

The MOE Tuition Fee Loan Scheme will cost around $400 more because of the higher interest rate of 4.75% per annum, accrued over the longer repayment duration.
Heres how to decide which student loan is best for you Graph3.png

Calculate your projected loan repayment amount and period
As summarised above, you can clearly see how your preferences play a role in determining the more suitable and cost-effective loan. 

The CPF Loan Repayment Period Calculator is a good tool that you can use to estimate your loan repayment period based on the repayment amount that you are comfortable with. 

Once you’ve calculated your preferred loan repayment amount and period, you can also try setting up a budget in advance so that you will be prepared when the time comes for repayment.

The diagram below is a simple example of budgeting based on a take-home pay  of $2,500 per month. Assuming that you need 55% of your income for basic necessities and wants, and you set aside 20% for savings and use the remaining 25% for the loan repayment. 

With this budget, you can expect to repay your loan within 4.7 years.
Heres how to decide which student loan is best for you 1.png

Tips on managing your student loan repayments
So far, we’ve compared the two main student loan options in Singapore. Once you’ve picked the one that is more suitable for your needs, the next step would be to ensure that you manage your loan repayments well. You can do this in several ways.

For a start, you can revisit your monthly budget and repayment plan to determine the exact amount that you want to pay based on your actual take-home salary when you land your first job. A good way to ensure that you keep to your repayment plan would be to set up automatic payment through GIRO.

You can also make lump sum payments on your CPF Education loan to clear your debt faster, whenever you have accumulated savings or receive a bonus from work. This will reduce the interest you ultimately pay.

Heres how to decide which student loan is best for you 2.png

Under the CPF Education Scheme, you also have the option to commence repayment of your loan earlier. You can submit an online request for this through “My e-Concierge” on my cpf Online Services, which can be accessed with your SingPass. However, do note that early repayment of bank loans typically incurs a penalty fee, so be sure to check up on that first if you are planning to take up the MOE Tuition Fee Loan instead.

Read also: 5 money tips I wish I had known earlier
Read also: 50 top money tips for financial health

There you have it: Education loan lesson, completed!

Having the facts laid out in front of you definitely makes it easier to make a better decision.

Let’s do a quick recap of the important things you need to consider when picking a loan and repaying it.

First, be sure to understand the details of your loan, such as the loan amount and interest rates, as this will determine how much you will end up repaying.

Second, decide on the amount you want to repay each month based on your income and expenses, and know how long it will take for you to pay off your loan fully. Stick to your repayment plan to ensure that you clear your debt duly!

Lastly, you can manage loans by setting up automatic payments via GIRO, and consider making lump sum repayments to clear your debts faster when you have the ability to.   

I hope this has been useful. I will definitely be applying this takeaway to future lessons that I encounter along my life journey!


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