Should you defer your education loan?

Covid-19 has wreaked havoc on societies around the world.

In addition to the health impacts, many individuals find themselves in compromised financial circumstances.

For example, Singapore's economy shed 19,900 jobs in Q1 2020, the biggest drop since the SARS outbreak in 2003.

On top of that, many individuals face reduced hours as businesses are forced to cut costs.

As many individuals face financial pressures, financial institutions and government agencies have provided various relief measures.

In this article, we examine one of these schemes and analyse its usefulness to new and recent university graduates.

What does student loan deferment look like?

The Monetary Authority of Singapore (MAS) partnered with major financial institutions, including Maybank, POSB and DBS, to allow education loan borrowers to defer principal and interest payments until January 2021.

Individuals that financed their education with OCBC's FRANK Education Loan, can defer until May 31, 2020.

Deferred study loans have several key features.

First, these loans will only accrue interest on deferred principal amounts, not on deferred interest (sometimes referred to as "interest-on-interest").

Additionally, borrowers are given the option to extend their loan tenure by their desired deferment period. This helps ensure that families and students won't be on the hook for massive monthly repayments down the line.

Similarly, deferred loan principals and interest will be fully amortised over the course of the remaining loan tenure, preventing "balloon repayment".

Borrowers will also be relieved to know that should they decide to defer their student loans, it will not be reflected as a restructured loan on their credit bureau report.

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Am I eligible for loan deferment?

Unlike some Covid-19 relief measures that require some proof that recipients have been directly impacted by Covid-19, this scheme is available to all willing borrowers without past due (90+ days) repayments.

The programme applies those with outstanding loans used for part-time or full-time course university tuition in Singapore and abroad.

Those seeking assistance with Tuition Fee Loans, should note that the Ministry of Education has deferred all loan payments until May 31, 2020.

Does it make sense for me to defer?

Like most financial decisions, deciding whether to defer loan payments is a personal one.

It is crucial to note that student loan deferment will cost more than repaying loans on your planned schedule, in terms of total interest accrued.

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Therefore, deferment is best for individuals who are currently under significant financial stress. Those looking for an easy way to save money or to simply take a month off from repaying their loans shouldn't defer.

If you are on the fence, we recommend reaching out to your lender, in order to better understand your options.

Borrowers that apply for loan deferment will receive details including their new monthly repayment schedule (post-deferment) as well as the total interest payable for the entire loan tenure before and after opting for the principal deferment and tenure extension.

These details will help clarify whether benefits of deferring (e.g. short-term relief, eased cash flow) outweigh the costs of putting off your loans (i.e. increased interest cost, longer indebtedness).

Advice for prospective students

Many of those with current or former university students in the family are adept at navigating the world of financial aid and lending.

However, this can be a scary time for those planning to send their oldest child to university, especially when they'll need to take out a loan.

For these families and students, we recommend comparing the best student loan interest rates available for studying in Singapore and internationally.

In addition to comparing the most affordable loans in terms of rates and fees, ValueChampion recommends that you consider repayment flexibility.

For example, some study loans allow borrowers to less during the student's university years, and more afterwards.

Other education loans stand out for their leniency for delayed monthly payments, should you need to resort to paying late.

Finally, other loans give preferred rates for study at certain institutions.

ALSO READ: Fresh graduates: Here's why you should never pay your university loans in advance

Determine best personalised plan of action

At the end of the day, everyone's financial circumstances are different. Just because your friend might be better off deferring their loans doesn't mean you would too.

However, if you believe that this relief programme might be a necessary way for you to get your finances in order during this crisis, we urge you to contact your lender in order to get more personalised details that you can use to compare your options.

This article was first published in ValueChampion.