Education is one of the most important aspects of our lives. In particular, college education is regarded in Singapore as a crucial step to a successful career. However, education has been becoming increasingly more out of reach for a lot of people, as tuition at the major universities in Singapore have increased by 38% since 2007. This in turn has increased the need for government subsidies and education loans to fund our tuitions. Are education loans a good way to fund our studies? Here, we examine how much education loans in Singapore really cost, and what factors can influence this cost over time.
Average Cost of Education Loans In Singapore
Education Loans in Singapore are typically categorized into three categories: 1) education loans with standard repayment, 2) education loans that only require interest payment during study and 3) education loans for study abroad. We’ve collected as much data as we could find on cost of these loans from different providers to arrive at the average cost below. On average, new education loans cost about 5% of interest per year plus about 2% of processing fee upfront. These rates also compare to 4.78% in interest plus 1% in fee (or 4.5% in interest plus 2.5% in fee) from the best education loans in Singapore.
Rest Rate vs Flat Rate
It’s important to understand that education loans in Singapore are priced with “rest” interest rates, as opposed to “flat” interest rates. In contrast, personal loans tend to be priced with flat rates. The difference between the two rates is that flat rates tend to be more expensive than rest rates because of the way they are calculated. Let’s examine this difference in detail.
First, let’s consider a personal loan of S$50,000 over 5 years with a flat interest rate of 4.99% (though they tend to have much higher interest rates over 10%). Because this personal loan comes with a “flat rate,” your interest is a “flat,” constant payment of S$50,000 x 4.99%, which translates to S$2,495 of interest expense each year. Then, your monthly instalment will be a constant amount consisting of S$208.92 (S$2,495 divided by 12 months) plus a principal payment of S$833 (S$50,000 divided by 60 months). After 5 years, you will have repaid your debt in full after having paid S$12,475 in interest. The key principle to understand here is that interest payment is kept “flat” no matter how much money you repay.
Now, let’s consider an education loan of S$50,000 over 5 years with a rest interest rate of 4.99%. Because an education loan in Singapore is priced with a “rest” interest rate, your interest expenditure is calculated based on the remaining balance of your loan after each month. This means that your monthly payment will be about S$943.33, which consists of an increasing amount of principal and decreasing amount of interest payment over time. Because the interest rate is applied only to the remaining balance (as opposed to the beginning balance for flat rates), you end up paying S$6,599.96 in interest over 5 years, half of what you would’ve paid on a personal loan. Because an education loan’s purpose is clear (to fund a person’s study), banks perceive less risk on these loans and tend to be more lenient on the borrower. Therefore, it’s always better to go with an education loan to fund your studies.
Factors That Influence Cost of Education Loans
Different factors can change the cost of your education loan. Below is a brief discussion of each of the main variables so you have a better idea of what to expect in the future when you are shopping for an education loan.
Market Interest Rates
Many education loans are priced around the prime lending rate in Singapore. A prime lending rate is the lowest lending rate which a bank is prepared to lend in Singapore Dollars to its best customers on an overdraft or demand basis. This changes all the time, and you can check out what it is at the beginning of each month on ABS’s website. If prime lending rates increase, education Loan rates could increase along with it.
Tenure vs Principal
When considering the cost of an education loan, you must think about the balance between total interest cost and monthly instalments. Ideally, you want to borrow as much as you need at the lowest rate possible. This means that you want to minimize total interest cost while making sure you can comfortably manage your monthly payment. Shop for the best rate, but make sure you only borrow an amount that you can manage. Most education loans in Singapore will allow you to borrow up to 70% of your car’s open market value (purchase price for new and used cars).
Standard Repayment vs Interest Only Repayment
For students who cannot afford to pay back the loan during their studies, lenders offer a special repayment program usually referred to as “interest servicing loans.” To put it simply, the borrower only needs to pay the interest back while they are in school (typically 4 years max). This can be a smart way of funding your studies especially if you won’t have enough time to work and generate enough disposable income to cover a full monthly instalment including principal repayment. One downside to this option, however, is that the total cost in interest you end up paying is much higher than it would be for a standard repayment. We illustrate the difference between these two options for a study loan of S$25,000 over 6 years, with an interest rate of 4.78% per year.
|Loan of S$25,000 Over 6 Years||Standard Repayment||Interest Servicing|
|Monthly Instalment During School||S$400||S$100|
|Monthly Instalment After School||S$400||S$747|
|Total Cost in Interest||S$3,956||S$5,720|
Who Can Get Education Loans In Singapore
Most public universities and polytechnics provide an education loan of their own. These loans are quite cheap, and can be used to pay up to 90% of the subsidized tuition fees (75% for polytechnics). We have a full list of eligible institutions here.
For those who need extra funding or do not have access to these public-school loans, education loans are available for Singaporean citizens and permanent residents above 16-18 years of age. though foreigners need an employment pass and a local guarantor. For those without sufficient income, a guarantor with at least S$24,000 to S$30,000 of annual income is required.