The MoneySmart Guide to Education Loans

education loan singapore

So you’re in a dead-end job and you’re looking to “upgrade” yourself and make yourself more relevant for the workforce. Instead of whining about your pathetic work life to your friends, how about going back to school?

Whether you’re going back as a full time or part time student, the cost of taking up further studies can set you back by at least $10,000 a year. And I’m just talking about studying locally! For most of us, that’s not an easy commitment.

The school you’re applying for usually has financial assistance schemes to help you with your school fees. If you don’t meet the eligibility requirements set by the school, don’t fret. There are also education loans available from banks and other financial institutions that make it easier to repay your fees over a longer period of time.

However, before you apply for the loan, make sure you check the following details:


How old are you now?

Generally, you have to be between 21 years old and 60 years of age to apply for an education loan. If you’re outside of this age range, not to worry, you may still be eligible for the loan. Applicants under the age of 21 will need to have a guarantor, while applicants over 60 years may need to have a shorter loan tenure. We’ll go further into these two points later.


How much income do you currently earn?

For local part-time studies, the applicant usually needs to have an annual income of about $18,000 to $24,000. If you aren’t earning that kind of money, or are planning to do a full-time course, then you will need to find someone to be your guarantor.


What is a guarantor?

As with any loan, the bank needs an assurance that you’ll be able to pay them back. Having a guarantor is the bank’s way of making sure that you’ll be able to pay back the loan. That usually means if you don’t pay the bank in time, they have a right to go after your guarantor. So make sure you choose someone who is really, really willing to save your ass when necessary.


What conditions must your guarantor fulfil?

Depending on the bank, your guarantor might need to be an immediate family member, like a parent, sibling or spouse. What they must be able to do is meet a certain income requirement. Of course, different banks and financial institutions will have their own specific needs, but generally the guarantor needs to earn between $24,000 and $30,000 per year.


How much can you loan?

Most education loans allow you to borrow between 6 – 8 times the monthly salary of the applicant or the guarantor. That means if you or your guarantor earn about $2,500 a month, then you’ll be able to loan between $15,000 to $20,000, which is generally enough to cover at least 70% of your entire school fees.


What are the repayment terms to look out for?

Here are three key components of an education loan that you need to take note of.

1. Interest rate:  As with any loan, the lower the interest rate, the more attractive the loan would appear. The smart thing to do is to shop around, and find out which bank or financial institution offers the lowest interest rates on their education loans.

You also need to find out if the interest is “flat rate” or “monthly reducing” or “monthly rest”.

Flat rate means that the bank has already determined how much interest you will be paying, based on your loan amount and the bank’s interest rate. This means that the interest charged each month remains the same no matter how much of the loan is still outstanding.

Monthly reducing or monthly rest means that the interest you pay each month is calculated based on how much of your loan is still outstanding. Therefore, the earlier you pay off your education loan, the less interest you pay. However, some banks may penalise you with a “repayment fee” in order to discourage you from making early repayment.

2. Processing fee: If an interest rate is too good to be true, it probably is. Low interest rates are the way banks attract customers. Then they charge a high “processing fee” in order to make up for the interest rate. When calculating the cost of an education loan, always remember to include the processing fee.

3. Other admin charges: These include disbursement fees, late payment fees, cancellation fees and repayment fees. They are often ways for banks to protect themselves from customers who don’t make timely payments or who want to make early repayment on their loan to avoid further interest. If you are consistent and disciplined with your loan repayments, these extra charges generally shouldn’t affect you.


What is the duration of the education loan?

Education loans generally have a tenure of 1 to 10 years. That means you can choose to repay your loan over a longer period of time in order to reduce the monthly amount. However, as with any loan, the longer the tenure, the more interest you end up paying. So if you can afford the monthly repayment amount, you should try to get as short a tenure as possible.

As we mentioned earlier, if you’re close to the age of 60, you’ll probably need to take a shorter loan tenure to be eligible for the loan. This is mainly because the bank is relying on you earning an income to repay the loan, and if you retire, then the chance of you defaulting on the loan is higher. Banks really shouldn’t worry too much though – Singaporeans will probably never retire!


When do you have to start paying the education loan back?

Nowadays, banks and financial institutions that offer education loans provide flexible repayment methods. Depending on your financial status, each method has its own pros and cons. Here are the two most common ones:

Method 1: Paying monthly instalments of principal loan amount and interest while you’re still studying. This may be good for part-time students who have a decent income. By getting the education loan out of the way early, they avoid problems with the TDSR, which might prevent them from getting a good housing loan.

Method 2: Paying only monthly instalments of interest while you’re still studying. After graduation, then pay monthly instalments of principal loan amount and interest. This means you end up paying more interest in general, but you don’t have to worry about a large commitment on your monthly finances. This would be best for full-time students, who aren’t earning an income.

Some banks, like RHB, allow a deferred repayment for full time local study. This means you don’t need to pay anything until you’ve completed your study, but your monthly repayment after graduation is higher.


Are education loans worth applying for?

One of the best investments in life is education, and at the relatively low interest rates being offered by banks and financial institutions, it really would be the smart thing to do. Use our education loan comparison tool to help you find the best rates that suit your needs.

Have you taken an education loan before? Share your experiences with us!