Why You Should Use An Education Loan (Even If You Have The Money)

You know what would really boost a student’s grades? It’s not tuition. We at SingSaver.com.sg have a simple and effective solution: make them pay the fees themselves.

With degree courses generally hitting S$40,000, the cost is nothing to sneeze at! And even if you have the cash sitting around, parting with all that money at one go may be a bad idea. Here's why.

How Much Does An Education Loan Cost?

In Singapore, most education loans have an interest rate of between four to six per cent per annum. This is generally cheaper than using personal loans, which range from six to nine per cent per annum.

Most education loans have a five-year loan tenure, and a further processing fee of three per cent of the loan amount.

Assuming you borrow S$40,000 for your degree course, for five years at a rate of 5.88 per cent per annum, this comes to about S$753 a month. The total interest paid over five years comes to around S$5,160.

Note that there are four different ways repayments can happen, when it comes to education loans (ask the bank for details). These are:

• You start paying each month, as soon as the loan is disbursed
• You pay only the interest each month, and start making full repayments only after your course is ended
• You don’t pay anything until after a given number of years (say four years, if that’s how long your studies take), after which you begin paying the loan as per usual
• Staggered repayments, in which monthly repayments are lower while you study, but higher once your course is ended

Note that your method of repayment affects the interest you pay. For example, if you choose a deferred payment, where you only start to pay after your course is ended, you will often pay a much higher interest rate.

So given the cost of borrowing (i.e, the interest and other admin fees you have to pay), it should always be best to pay in full if you have cash, rather than take the loan, right? Not always.

There are circumstances when it may be better to use a loan, even if you have the cash on hand. These situations include:

• Intent to study abroad
• Pre-existing conditions that affect insurance
• Opportunity costs
• Studying while you have dependents

1. Intent to Study Abroad

Studying abroad can bring a lot of unexpected costs. For example, student lodgings (or a landlord if you live off campus) can suddenly raise rent, currency exchange rates can rise, and foreign government policies can result in costlier studies.

Due to the large number variables, it’s almost always a better idea for you to hold on to cash reserves. You can use your the cash to pay the monthly instalments, and still have money in the event something goes wrong (e.g. cost of living is higher during one semester, due to a currency exchange spike).

You’ll lose some money due to the interest rate; but it’s better than being thrown into a panic when you run out of cash for emergencies, and get distracted from your studies.

2. Pre-existing Conditions that Affect Insurance

If you don’t have comprehensive health insurance, it’s dangerous to part with all your cash at once. Take special note if you have pre-existing conditions, such as heart palpitations or diabetes - many insurance policies don’t cover you for these, and MediShield Life will only cover some hospitalisation costs for them.

Suffering from a medical condition while studying is bad enough - it will get even worse if you’ve spent all your money on the course, and can’t deal with the emergency. It’s hard to pay attention and excel, when you’re in pain and constantly being chased by hospital bills.

Don’t part with all your money at once, if there’s a chance you could fall ill with limited insurance cover. Keep some of your money on had to deal with any emergencies or unexpected hospital costs.

3. Opportunity Costs

If you invest or save the money, and then work your way through school while making education loan repayments, you could graduate with a nest egg.

This can be helpful if you want to start a business right out of school, or if you want to buy time while looking for the ideal career. But if you have no money after you graduate, you’re often forced to take the first job available).

Even while you’re in school, having some cash on hand can provide opportunities. For example, you might be able to afford an exchange programme, or to fly abroad for field trips and research opportunities. In this sense, choosing to retain money can help you make the most of your education.

4. Studying While You Have Dependents

Lifelong learning is no longer the exception, but the norm. If you start your university studies midlife, or even later in your career, you may have dependents to look after.

Whether you have children, elderly parents, a non-working spouse, etc., we would recommend against emptying your bank account to study. This will leave you unable to provide for your dependents, which could in turn cause you to quit your studies.

Keep the cash on hand, for any of your dependents’ needs. You can still minimise interest costs, by not choosing options such as deferred payment - start servicing the loan as soon as you begin your studies.