Written by Qiu Yiming, edited by Jackie Tan.
Many students in Singapore take up loans for the purpose of financing their higher education. This makes student loans fundamentally different from other consumer loans, which are made by households to purchase goods that would be consumed immediately. Taking student loan is, in some way, more similar to an investment – it helps borrowers to to gain knowledge and skills through their university education, which would enable them to perform better and gain higher earnings in the future.
Similar to all investment activities, taking student loans involves giving up resources and exposure to risks. Upon graduation, borrowers will face a substantial amount of debt, accumulated during the years of studies which has to be repaid regularly together with interest. Most students would want to repay the loans as soon as possible. After all, the longer you take to repay the loan, the more interest would be incurred, and the more you have to pay in the end. However, before you put all your extra salary into loan repayment, here are five considerations to make so you can make the best decision.
#1 How much money you need monthly to have a decent standard of living?
The first thing you need to consider is your monthly living expenses, which are the money you need to spend on necessities so as to have a decent standard of living. You can calculate this by referring to your past spending history, and make adjustments based on any changes your plan to make. The table below is a guide for you to calculate your monthly living expenses:
#2 How much salary do you take home monthly?
After calculating how much you need to live, you also need to know how much you take home and how much you are left with. Your monthly take-home pay is calculated by subtracting your CPF contribution from your monthly salary, which is 20% and is up to a maximum of $1,200 per month.
#3 Saving for emergency situations
It is always important for you to have some savings for emergency situations. This way, you will be financially prepared to deal with unforeseen circumstances in the future. You may also consider other factors, such as whether your parents would lend you money should emergency situations arise, when deciding on how much you need to save. That said, you should not count on your parents to lend you money.
#4 Calculate your loan repayment period under different scenarios
The earlier you repay the loan, the less interest you incur, and the less you need to pay in total. There is, however, a tradeoff between your total loan repayment amount and your living standard. You either choose to take longer time and spend more on loan repayment while maintaining a decent living standard, or take shorter time and spend less on loan repayment, with little to spend on your other activities. To find the right balance, you can calculate and compare loan repayment period under different scenarios.
Here is a formula you can use to calculate your repayment period:
PV (present value) is the total amount of debt you have; PMT (payment) is the monthly loan repayment you plan to make; I (interest) is the monthly effective interest rate; N is the total number of months you need to repay your loan.
Simply insert your PV and I values, and try out different PMT values to obtain N. You can play around with the figures until you find something acceptable.
There are several loan calculators out there; we used the loan calculator in this website: https://www.thecalculatorsite.com/finance/calculators/loancalculator.php)
#5 What is your personal preference?
Some people just dislike debt. The feeling of owing someone something adds psychological burden on them so it is better for them to repay their debt as soon as possible. If you are one of those people, consider a larger amount of monthly loan repayment (PMT), so you will have a smaller total number of payments (N) and get rid of your debt in a shorter period. If, however, you belong to the group of people who regard happiness and high living standard as very important, and do not mind holding debt for a long period of time, you may want to have a smaller monthly loan repayment, giving yourself extra money to spend on other activities. Do note that the longer you take to repay the loan, the more interest would be incurred on interest due to compounding effect, and the total amount you have to pay to get rid of debt may increase a lot in the end.
Debt is not always a bad thing. Student loans are investments in human capital and may be necessary for you to find good jobs. The repayment of student loans do create headache for some. To have a bigger picture and to make the most suitable choice, ask yourself these five questions when making your loan repayment plan!
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