A young student poses in her graduation gown

Pay off your student loan fast

You’ve graduated from uni or poly and you’re raring to start making real money for yourself. But hang on, there’s still a student loan weighing you down. How should you juggle your loan commitments when you’re only just starting out in your working life? Some questions you might be asking:

  • How should I prioritise my education loan repayments against my other commitments?
  • Should I make lump sum early repayments?
  • How much should I set aside for my monthly repayment plan?

Let’s take a look at what you can do.

Check your loan repayment requirements

Grab your copy of the loan repayment policy and study it. Some policies provide a short window between graduation and having to start making repayments for your loan. Others offer flexibility in the monthly repayment amounts or tenure.  If your loan does not charge interest before graduation and allows for early repayment, it may be prudent to pay off part of the loan before interest starts accruing. This means interest will only incur on a lesser portion of the overall loan.

Work out a reasonable budget

Work out your budget for loan repayments

If you’ve secured a job immediately after graduation, then use the time between starting your job and the onset of the repayments wisely – for example, saving as much as possible to reduce your loan amount or by building up your emergency fund. Aim for three to six months’ savings for your rainy-day fund, in case of an emergency that requires access to ready cash.

To work out your repayment amount, list down your living expenses (food, transport, the occasional treat) and financial commitments (insurance premiums, parent allowances). From the balance, determine a sum that you can comfortably afford.

Stay disciplined and on track

A young man works out his monthly sums on a laptop

While many loan packages offer flexible repayment plans, you should aim to clear your loan as fast as possible. Each month, prioritise your loan repayments over other expenses, such as concert tickets or that short getaway. The sooner your education loan is paid off, the quicker you’ll be able to take the next steps towards financial independence.

Some may opt for the minimum payment of S$100 per month, but don’t realise that this will only prolong the tenor of the loan. Over time, the interest incurred monthly (depending on the loan size), could actually exceed the minimum monthly repayment amount of S$100. So what eventually happens is that the loan is not being paid down over time, but is actually growing bigger.

If the loan maturity date is further overlooked, one might get a rude shock when the loan actually matures at the end of the loan tenure and the remaining outstanding balance becomes due in full. And late fees are incurred on a monthly basis for as long as the loan is not fully settled.

Chip away at the principal with lump sum payments

Your side income from that part-time job can be used to make additional payments to your student loan

Most student loans allow you to make additional payments without penalties, so use any bonus from work, or income from side gigs, to constantly reduce this amount. If your financial situation improves or you get a raise, remember to adjust your instalment amount accordingly. Will this really help? Yes, especially when you consider that the interest rate for education loans currently ranges between 4.5% to over 5.39%.

Or clear it all

For those who have the means to pay off their student loans upon graduation, the question arises on whether there might be a better use of their funds, for example investing it. However, bear in mind that in order to come out ahead, your investments would have to consistently outperform the interest rate your education loan incurs over the entire tenure. Since investments inevitably carry some risk, especially if you’re after higher returns, you’ll need to have the risk appetite for this route, and should also have an alternative plan if your investments do not generate the returns hoped for.

In summary, there isn’t a one-size-fits-all strategy when it comes to clearing your student loan. However, being diligent in paying off as much as you can reasonably afford will put you in a good position to start reaping the rewards of that hard-earned degree.

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