Monday, February 22

Make full use of interest free study loan


If you are or you have kids who will be entering university soon, you should take advantage of the interest free study loan and tuition fee loan and use the funds to invest. The returns that are generated can be used to offset the cost of a university education slightly.

Fresh undergraduates who will be entering into any of the 3 local universities which includes NUS, NTU and SMU are usually able to take a tuition fee loan of up to 90% of their course fee. Depending on the selection of course, it ranges from around $6500 for most courses such as Engineering or Science to slightly less than $19,000 for medicine. Subsequently, they may be eligible to take up a study loan that can pay for the remaining 10% of their course fee and a living allowance of $3,600. For most courses, this means that the recipient can receive up to a potential amount of at least $10,000. Throughout the entire course of study, interest will not be charged on the loan amount. As such, if you have enough funds to pay off the tuition fee, my suggestion is that you should not pay it off straightaway but keep it to generate some returns and try to get the study loan too.

Let us consider an example. An undergraduate will be entering into an Engineering course in NUS soon and he is able to secure both the tuition fee loan and study loan. The undergraduate has enough funds to pay off the tuition fee but he will be taking up the tuition fee loan and the study loan. Currently, the course fee for Engineering at NUS is $6,620. Taking into account of the study loan, he will be receiving a total of $6,620 + $3,600 = $10,220 at the start of each year for the entire course of study. Since the preservation of the tuition fee is of utmost importance, the funds that he has received will be invested in a principal guaranteed or risk-free investment such as SGS bonds, structured deposits or fixed deposits. For the sake of illustration, we assume that we are able to invest the funds yearly with a return of 1.0% per annum.

Year 1
Amount received = $10,220
Interest received at end of Year 1 = $10,220 x 1%
= $102.20
Total amount at the end of Year 1 = $10,220 + $102.20
= $10,322.20

Year 2
Amount received = $10,220
Total amount at beginning of year 2 = $10,322.20 + $10,220
= $20,542.20
Interest received at end of Year 2 = $20,542.20 x 1%
= $205.42
Total amount at the end of Year 2 = $20,542.20 + $205.42
= $20,747.62

Year 3
Amount received = $10,220
Total amount at beginning of year 3 = $20,747.62 + $10,220
= $30,967.62
Interest received at end of Year 3 = $30,967.62 x 1%
= $309.68
Total amount at the end of Year 3 = $30,967.62 + $309.68
= $31,277.30

Year 4
Amount received = $10,220
Total amount at beginning of year 4 = $31,277.30 + $10,220
= $41,497.30
Interest received at end of Year 4 = $41,497.30 x 1%
= $414.98
Total amount at the end of Year 4 = $41,497.30 + $414.98
= $41,912.28

Total amount received = $10,220 x 4
= $40,880
Return on investment = $41912.28 - $40,880
= $1,032.28
Percentage reduction in tuition fee = $1032.28 / ($6,620 x 4)
= 3.9%

From the above calculation, it can be seen that the funds can be used to offset the tuition fee by 3.9% using a investment return rate of 1.0%. I do think it is possible to get a higher interest rate of slightly above 1%. Although the amount saved is not a lot, this offset of tuition fee seems to be 'free' as all we are doing is to generate interest on the tuition fee loan and study loan during the course of study in which interest is not charged on these loans. So this is something which you may wish to consider if you or you have any children who are entering into a university soon.

5 comments:

Hi Kay,

Just wanted to know where can we obtained the interest free study loans ?

Thank you

Regards
Phyllis

Hi Phyllis,

It is not exactly interest fee loan as it is only interest free during the course of study. These loans are usually administered by the respective student administration of the universities thus before the commencement of the courses, undergraduates will be notified on how to apply for these loans.

Kay

Hi Kay

Thot there are income limits for such loans..from the universities and so not everyone can apply

Hi,

This article is meant more for undergraduates who are commencing their studies at the local universities. In this case, there will be no income limits.

Kay

The debt burden of student loans is enormous.