Remember when you were a kid and prayed fervently for the day to arrive when you would never again have to go to school? Now that you’re older, you might, in a move that would surely have shocked your 8-year-old self, actually want to prolong your days as a student—and even be willing to pay good money for it with the help of an education loan.
If you’ve been looking at course fees recently, we really don’t blame you for turning a ghastly shade of white. A year’s worth of tuition fees at a private school in Singapore can cost more than $10,000, and if you’re planning on going overseas, you’ll have to factor in the cost of living as well.
If you’re enrolling at a local public institution (like NUS, NTU and the like), your school probably offers a study loan. If you or your parents have CPF funds to spare, the CPF Education Scheme is also an option.
Otherwise, you’ll probably have to knock on the doors of banks and other financial institutions and see who will lend you money. Here are some things you must know:
1. Do You Qualify?
If you’ve been jobless for the past five years and have finally decided to further your studies so that your parents stop asking why you’re not employed, you’re might have a tough time getting a loan.
As a general rule, you will have to be at least 21 years old to get a study loan. Unfortunately, that’s the easiest requirement to fulfill.
The person who applies for the education loan will also have to have meet a minimum income requirement, which depending on the loan and the bank can be from $12,000 to $30,000. Obviously, many students don’t have that kind of money.
This is where your parents come in—they can be your sponsors and apply for a loan if they fulfill the income requirements.
Actually, a sponsor doesn’t need to be a parent, and up to two sponsors can also apply for a loan to pay for your studies. So if you have a sugar daddy or sugar mummy (or two, even)… just sayin’.
Alternatively, you can nominate a guarantor, meaning the bank will come after this person if you don’t pay back the loan. The minimum income for guarantors is typically higher, at least $30,000 in most cases.
2. Interest Rate
This Fashion will always be cheaper than Louis Vuitton, just as Sheng Siong will always be cheaper than Jasons Supermarket.
But the same is not true of loan providers. Interest rates change all the time, and there is no such thing as a “premium” or “branded” education loan.
So you need to do your own research before you take out a loan instead of relying on other people’s outdated recommendations. Hint: you can do so right here on MoneySmart!
3. What Type of Loan?
There are two main types of education loans, flat rate and monthly rest.
Don’t panic, it’s not as complicated as it sounds. Here’s what it all means:
- Flat rate: they calculate the entire sum (or the sum for a certain number of years) of your interest payments at the start of the loan.
- Monthly rest: interest is calculated based on reduced balances each month.
Monthly rest usually works out to be cheaper overall than fixed rate, but sometimes banks show both rates, so it’s important to find out what the loan package is really calculated on.
4. Paying Back Your Loan
The loan tenure—meaning the total duration of your loan—can differ wildly. Some loans are as short as 1 year, while others can stretch as long as ten years.
Different banks also offer various types of payment schemes. These can include the following:
- Start paying your monthly instalments right after they disburse the loan
- Pay only a fraction of the full instalments until your course ends (or within another timeframe)
- Pay only the interest each month until your course ends (or within another timeframe)
- Pay nothing until you have completed your course, after which monthly instalments will commence
5. What is The Prepayment Penalty?
If you try to pay off your loan earlier than expected, the bank will make you pay a prepayment penalty. Since people try to pay off their loans earlier in order to save on interest payments, banks usually try to claw back some of your savings by making you pay a penalty.
They might make you pay a certain amount, say 1% on the amount of either the original loan amount or the amount you want to prepay.
6. Are There Any Other Fees?
You usually need to pay a 2% processing fee, which is typically deducted from your first disbursement.
If you sign the letter of offer and then back out, you might be made to pay a cancellation fee, for example of 1% on the amount you have cancelled.
Depending on the mode of payment you choose for your installments, there may also be disbursement fees involved. For example, if you opt to pay by cashier’s order or telegraphic transfer from overseas, you will need to pay the associated fees.
If you’re looking for the best education loan out there, MoneySmart has aggregated all the best rates on the market with their Education Loans Wizard so that you don’t have to look all over the place!
Are you planning to take out an education loan or have you done so already? Share your experiences in the comments.