Guiding our children through their years of education and seeing them through university is often a profound experience, the fruition of years of painstaking upbringing. When I entered university, I took up my school’s Tuition Fee Loan which would fund 90% of my university fees interest-free up till the day I graduated. Before I paid the remaining fees, my father told me:
“Your school fees is still my parental duty”
Through careful planning, my parents had very comfortably set aside sufficient funds to see both my brother and I through our university education which would have cost way more than I expected.
One of the biggest mistakes people make in university education planning is not starting early enough. You might think of it once he hits double digits, but you would have lost out on a decade of interest accumulated.
Planning for a university education is a long-term financial goal. Really, you should be starting as soon as you have a baby in your arms. Assuming he or she enters university between 18 – 21 years old, you would have nearly two whole decades to tailor a university funds as my parents did. The effects of compound interest would allow you to achieve this goal with small habitual contributions over the years.
With inflation and various other economic forces, both university tuition fees and our cost of living becomes more expensive each year. This is the tuition fees for 2019’s admission into Singapore Management University (SMU)’s Bachelor’s Degree programme. When calculating education cost, it is important to factor in its future value. The same university degree programme is estimated to cost 68% more 20 years from now.
The true cost of university education in 2019 How about living expenses?
Applying the same 2.65% p.a. inflation and the total cost of university education balloons to S$150,000 by the year 2040. We share with you 8 ways we can fund a university education in Singapore:
1. CPF Education Scheme
Consider the CPF Education Scheme before you apply for an education loan. If pursuing a local university education at the following schools:
- Polytechnic-Foreign Specialised Institutions
Under the CPF Education Scheme, the undergraduate can use their parents’ CPF to pay for almost the entire course fees and commence repayment of the CPF loan a year after graduation. As the interest rate is pegged to the prevailing CPF OA rate of 2.5%, it is generally lower than education loans offered by most banks. The CPF Education Scheme is one of the cheapest financing options for those pursuing a local university education without prior education financing plans and scholarships. The loan repayment plus interest commences 1 year after graduation and can either be paid in a lump sum or monthly. CPF Education Loan Repayment Period Calculator is helpful to compute the repayment duration needed.
2. MOE Tuition Fee Loan
Those studying in the above listed local universities who do not use the CPF Education Scheme may consider the MOE Tuition Fee Loan. Up to 90% of tuition fees can be loaned interest free during the period of study and require repayment only 2 years after graduation.
Generally, if you are able to pay off the loan very quickly after graduation before the interest rate accumulates, you would find the MOE Tuition Loan better for them compared to the CPF Education Scheme.
3. Education Loan from banks
For those undertaking private university degrees and are unable to take up the schemes mentioned above, a bank loan would be the next option. While some cost slightly more than others, it would be useful to compare the rates offered by the various banks and determine which bank to go with based on your intended repayment strategy.
Those not fortunate enough to be awarded scholarships, we can see there are really only two ways to fund university education:
4. Education savings plan
One of the advantages of saving early is allowing our money to compound and grow. It may be 10 years, 20 years before your child enters university but the earlier we plan for the education, the more room we can make in our finances for a university education fund. A small habitual monthly contribution over a long period is less disruptive to our lifestyles and other financial goals than squeezing out $100,000 or more in a short period. An education plan to compound our savings with flexibility for rainy days goes a long way and also safeguards us from straying away from saving for the university education.
Depending on your risk appetite, a plan to invest in stocks and bonds may also be advisable. A year or two before the funds are required, you can transfer the funds to lower-risk investments vehicles to ensure funds are available upon university admission even if the investment performance happens to take a dive for the worst.
6. Personal Savings
We could use our bank savings to pay for university education fees, but as we may have learnt at some point or another, the base interest offered by banks are practically negligible and we lose a chunk of it to inflation. Instead of leaving it in the bank, we are better investing it or allocating the funds into a education savings plan.
7. Scholarships and bursaries
Scholarships are the most desirable form of financing university educations. It entails certain prestige and recognises academic or non-curriculum achievements. Apart from its recognition and prestige, scholarship removes financial concerns and some even cover living expenses and daily costs. The scholarship is beneficial both to the undergraduate student as well as his/her parents.
Since primary and secondary school, students who performed well in schools are awarded Edusave scholarships and awards yearly which can range from $200 to $1,000. These are seriously quite attractive. While we may give these to our kids as personal savings or gifts for their hard work, they could also go towards saving for higher education.
8. Prioritise high interest loan repayments
If you have existing high interest money in the form of credit card fees or personal loans, it is best paid off as quickly as possible. These loans of 10-20% quickly add up and could lose you thousands in interest if not managed, eventually severely affecting personal finances.
The CPF Education Scheme interest rate stands at the prevailing OA rate of 2.5% while tuition fee and bank loans are upward of 4.3%. On the other hand, 2019’s SIBOR rate for home loan stands at 1.928% which is much lower than education loan interest rates. This also means that if you are expecting an education loan soon or are currently servicing one, it would be useful to pay it off earlier than the housing loan.
How did I do it?
At a very early age, my parents committed to an education savings plan of $250 per month, Furthermore, when I entered university at 22, I applied for the Tuition Fee Loan which was interest-free on the 90% loan amount during the course of study.
We withdrew $10,000 worth of coupons from the plan upon admission to fund the 10% of university fees, pay certain miscellaneous expenses and the other $15,000 in my 3rd year of university to fund my exchange programme to Europe. By graduation, the education plan would give a maturity sum of $77,689, well covering my education would be paid off before the interest rate of 4.75% p.a. kicked in.
Disciplined and habitual contributions has helped us to set aside $75,000 which compounded into $102,689, or over $1,000 capital gain annually by doing absolutely nothing nor being investment savvy. This funded my university stress free and even leaving the excess for my parents’ retirement.
The importance of education planning
We hope this article sheds some light on the importance of education financial planning and has provided you with useful tips on the way to approach it. Millennials Finance’s process begins with reviewing your financial circumstances, concerns and goals before recommending a suitable plan for you. Contact us today to schedule an appointment.
Something about this article that was not clear or do you have a question pertaining to Education Planning? Let us know below or drop us a message.