Tertiary education is the gateway to a wide range of careers. Unfortunately, even with government grants, there is an expensive toll charge for entering this gateway in the form of tuition fees. The impact of tuition fees are felt mostly by those without scholarships or family members who are able to first help foot the bill using their CPF or savings. These students turn to banks for a student loan, which for the most part, start charging interest upon graduation.
The common inclination of debt aversion leads to the natural instinct to pay off one’s student loans as soon as possible. This is because the longer you take to pay down your debt, the more interest will be accumulated, and the more you pay in total. If you want to save on interest, you would want to do all you can to get rid of your debt.
However, is this the only way to look at tackling student loan debt and be financially prudent? Here are some factors to think about to formulate a holistic, sustainable plan for paying off your student loans.
Crunch the Numbers
Numbers are central to the loan and your plan should be informed by the math. Here are some questions you should ask yourself to help you plan your loan repayment strategy:
- How much is the total loan sum?
- What is the interest rate?
- How much can you afford to pay per month?
- How long will it take to clear the loan?
- How much interest will you end up paying over the total loan repayment period?
It is important to figure out these facts about your loan, as they will affect your priorities. Obviously, you should try to clear your debts as soon as you can so you won’t have to pay too much interest. Yet, at the same time, it is simplistic to just allocate every dollar you can to servicing your loan, without considering how much of your salary you can actually afford to allocate to loan repayment, while having enough for other important expenses.
Costs of Large Monthly Loan Repayments
Allocating a large part of your salary to loan repayment means that you can pay off your loans faster, but that also gives you less cash for other important things in your life, like insurance and cash savings for emergencies.
It’s important to set up an emergency fund (typically 4 to 6 months’ worth of your expenses) even as you are paying off your loans. That way, you would be financially prepared, should unforeseen circumstances befall you. For example, if you lose your job, or if you have a mishap that requires you to pay hefty hospital bills, your emergency fund will be able to tide you over that difficult period.
Without an emergency fund, you may end up adding to your parents’ financial burdens as you will not have sufficient cash flow to survive on in the interim. What starts out with good intentions may very well land you in a worse situation than before.
How is Debt Affecting You?
There is more to paying off than the money and incurring interest. Carrying debt also carries with it an emotional price, which affects people in different ways.
There are people who are comfortable with taking their time to pay off their loans, acknowledging that the interest accumulated for the fees are part and parcel of taking one in the first place. On the other hand, there are people who are vexed about their loans accumulating interest over time, and should strive towards paying off their debt as soon as they can.
So, while a little debt isn’t a big deal, if it helps your overall sense of well-being by a large extent to know you have less obligations, then prioritising your debt repayments is valuable for both the tangible and intangible benefits it brings.
Practical Next Actions
You can start with organising your expenses to calculate how much you need to survive. Set realistic expenses targets, don’t set a drastically low budget for personal expenses (again, out of good financial intentions), only to end up breaking the budget monthly. That would affect your morale, as well as your will to pay off the loans over time.
Its better to start with reasonable monthly loan repayment amount and then increase when you can. Perhaps you learn to optimise your spending better, or manage to cut some recurring expenses by tweaking your lifestyle. Periodic bonuses or pay raises are also great ways to pay down more debt, without making yourself “suffer” more.
There isn’t a hard and fast rule of how you should best portion your salary – everyone has different needs and priorities. Nonetheless, make it a point to set up an emergency fund, have a realistic budget for personal expenses, and then consistently but patiently make your student loan repayments.