While an education loan gives you access to your dream education programme, leaving it unattended for too long isn’t recommended. That’s because these loans can be quite expensive.
Once the grace period expires, you’re expected to pay off not only the loan principal but also accrued interest charges. If you don’t make payments on time, you could risk attracting higher interest rates and additional fees.
This could severely disrupt your cash flow, and leave you high and dry. That is why it is important to have a smart strategy in place to tackle the outstanding debt before it gets out of hand.
Let us now see what an ideal plan could look like.
Here are some things that you should consider to rein in your student debt without disrupting your cash flow:
Most government education loans in Singapore and even private education loans (depending on the repayment schedule that you have chosen) usually provide a grace period. This period usually coincides with the duration of the programme. It could go up to 6 months/1 year after you graduate or until you find a job, whichever is earlier.
While a grace period is expected to give you a breather because you don’t have to make loan payments during this period, if you can start payments, it can help. How? You’ll be ahead of the payment schedule and might be able to reduce your monthly instalment amount.
If you continue to make payments on time thereafter and maintain a good credit score consistently, some lenders may even offer you a better deal.
In any case, if you can start making your payments early, you can make allowances for it in your annual budgets and get used to the cash flow arrangement early.
To stay on track with your loan repayment goals, you need to make full payments regularly. This could mean that you would save appreciably on interest charges, going forward. You can also avoid unnecessary fees and charges. This could lower the strain on your finances and help you become debt-free quicker.
This is where the habit of budgeting your expenses could help you. If you already have a job, start comparing your average expenses against your income.
Create separate portfolios. One could be the basic necessities that you can’t do without. This could include your home rent, food-related expenses, utility bills, and transport expenses among other things. Another portion of your income should be allocated for payment of the loan instalment.
One portion of your income should be allocated towards an emergency fund. Ideally, the fund should have enough liquidity to support you for a period of 4 to 8 months, in case of an emergency such as lay off. A portion could be allocated towards relatively safe investment options, such as structured or fixed deposits. If you have a higher risk appetite and the right means, you could even consider mutual funds.
Try to squeeze a portion out of the budget for insurance. Any remaining amount could be used for your leisure activities.
Now, you must be wondering how you could possibly have a savings big enough to make significant allocations to each category described above after you have made a full monthly repayment. It might sound counterintuitive but it isn’t. This is where you need to use your discretion.
If you start making loan repayments without saving anything for your rainy days or investing in a premium insurance product, you could be asking for trouble. Hence, start using a quality budgeting calculator first to understand what your financial commitments are, how you could maximise your savings, and how you could channel the extra savings for paying down the loan.
You might soon realise that this is a far more sustainable arrangement in the long run.
Most lenders may not charge you any additional fees for prepayment or paying more than the instalment amount. If you get a bonus from your regular job or get a handsome return from an investment you had made, use it for loan payment. Also, if you get a permanent salary hike, you could request the lender to restructure the loan. This could help you save on your loan.
It’s good to be frugal. But, be realistic. Can you sustain on the bare minimum, just to make sure that you pay off your student debt in the quickest possible time? Try to cut down on discretionary spending but in overzealousness, don’t make the mistake of not allocating any portion of your income towards discretionary spends.
The following are some ideas that could help you reduce your monthly spend without forcing you to alter your standard of living in a major way:
On a monthly basis, your savings from each spend category could seem insufficient. But, the cumulative effect of these savings on a long-term basis could be substantial. One dollar saved is one dollar more that you could use to pay the loan dues. Keep at it and you could start enjoying the benefits of this plan sooner than you believe.
This is probably not a very practical idea for most readers because students fresh out of college may not have the financial resources to do so. However, if you can afford to pay off your debts all at once, should you do it?
Ultimately, it boils down to one important question. Are you serious about repaying the outstanding loan balances? Whether you wipe it off at one go or you do it in multiple instalments, you’ll need a proper plan and discipline. The goal here is to become debt-free. How soon or late you achieve this goal is in your hands and will depend on your circumstances.
If you do that, you won’t ever have to regret taking a loan to support your higher studies and ambition for a better life.