As the saying goes, education is our passport to the future. But how much does a good education cost? An estimate from the HSBC Value of Education survey in 2018 put the cost of getting a degree from a local university at anywhere from $28,000 to $146,750. If you study overseas, the cost is usually at least $100,000 and can rise to about $368,100 for tuition, room, board, and fees alone for a four-year degree at Harvard University, for instance.
It is crucial to start planning and saving early. You wouldn’t want to be in a situation where your child qualifies for a degree course but there’s not enough money to fund that bright future. Furthermore, you wouldn’t want your children to start their working lives in debt. Mr Poh, a 35-year-old systems analysts, recounts his experience, “I wish my dad had planned an education fund. Paying $2,000 per month for two years to settle my education loan is no joke! That is why I want to prepare in advance for my son now.”
He is doing so by investing in an education savings plan, similar to 28-year-old accountant Janice, who believes in systematic savings, an attractive feature of such plans. “With the tuition fees so high, I bought my plan early to ensure I save money on a regular basis to help cover the eventual costs and develop a disciplined money-saving routine,” she said. “I didn’t want to have my child bear the responsibility of paying off a loan when she is just at the start of her career.”
An education savings plan is, comparatively, the one that gives the most flexibility, though your preparation will have to start early. We will delve more into this – let’s look at the four main types of financing when it comes to tertiary education, and the pros and cons of each option:
1. Central Provident Fund (CPF) Education Scheme
CPF members can use the money saved in their CPF Ordinary Account (OA) to pay for tertiary tuition fees for themselves, their children or their spouse. The amount used can cover up to 100 per cent of the tuition fee of approved courses.
Under this scheme, you can use your OA savings up to the Available Withdrawal Limit. This is either your OA balance or 40 per cent of your accumulated OA savings, whichever is lower. Bear in mind that most of us would use our OA savings to fund our homes.
The money taken out to fund the education, though technically belonging to you, the CPF member, is considered a loan. Thus, it has to be “repaid” with interest. You will accrue interest (currently pegged at interest rates of 2.5 per cent) as soon as the funds are withdrawn.
Repayment starts one year after graduation or after leaving the institution and the full loan will have to be repaid within 12 years. Also, it can only be used to fund full-time subsidised courses conducted locally at the approved educational institutions.
2. Ministry of Education (MOE) Tuition Fee Loan (TFL) Scheme
This is an initiative by MOE to encourage banks to offer tuition fee loans under a set of standardised conditions. Full-time students of local universities, polytechnics and some other educational institutions, not including Lasalle and NAFA, are eligible. Under the scheme, you can borrow up to 90 per cent of the payable tuition fees.
Interest is accrued only after graduation and is based on the average prime rates of local banks. A guarantor is also required. For this scheme, repayment starts no later than two years after graduating from or leaving a polytechnic or university respectively. There is a maximum repayment period of 10 years for those who obtain a diploma and 20 years for degree-holders.
3. Education Loans from Banks
These loans have variable interest rates, which generally start at over four per cent, as well as a host of conditions. In general, the applicant needs to be at least 21 years old. If not, they will need a guarantor, co-applicant or sponsor who is of age.
Interest rates will also be accrued starting from when the funds are drawn, and repayment plans depend on the loan conditions. Some require both loans and interest to start being repaid once you take out the loan. In others, only interest payments are required during the period of study.
4. Education Savings Plans
This is essentially an endowment policy offered by an insurance company, and it would pay a lump sum after a specific period, usually between 10 and 20 years. The premium would be a fixed sum – this encourages a habit of regular systematic saving, helping parents save for the future in consistent and measured steps.
40-year-old banker Ms Wang sees this as a win-win situation. “Saving for my daughter’s education would be necessary since education costs are on the rise. I believe in systematic saving and I could even use it as part of my retirement if she gets her own scholarship!” she says.
In addition, an education savings plan usually comes with associated insurance coverage for death or critical illness, for example. There may also be an option to add a rider to ensure that the plan continues should anything unfortunate happen to the parents. This way, you can be assured that your children will still be taken care of no matter what happens. It’s a huge advantage over the other three options, which offer no insurance coverage.
(See also: Grow Your Kids’ Ang Pow Money – Here’s How!)
Key Differences between Education Financing Options in Singapore
|Financing Options||Education Savings Plan||CPF Education Scheme||MOE TFL Scheme||Education Loans|
|Loan Interest Rate||Not applicable||Accrue interest as soon as funds are withdrawn (currently at 2.5%)||Interest is accrued only after graduation (starting from 4%)||Interest on the loan amount is payable from day one (starting from 4%)|
|Rate of Returns||Different education savings plans offer different projected rate of returns||No rate of returns||No rate of returns||No rate of returns|
|Restrictions||No restriction (e.g. on the type of courses or institutions) on the use of funds||Only for full-time subsidised courses, conducted locally at approved educational institutions||Only for full-time students of local universities, polytechnics and other selected educational institutions||Usually no restrictions on the course and/or institution|
|Repayment Period||No repayment as the funds are yours||Repayment starts one year after graduation; full loan to be repaid within 12 years||Repayment starts no later than two years after graduation; full loan to be repaid within 10 years for diploma and 20 years for degree holders||Some form of repayment – either loan and interest or interest only – will usually start during the period of study|
|Insurance Coverage||Insurance coverage – for death or terminal illness – is built into most education savings plans||No insurance coverage||No insurance coverage||No insurance coverage|
Out of all four options, the education savings plan route offers the most flexibility. Many education savings plans even allow for staggered payouts at significant milestones of your child’s education journey. For example, you may like to take out an amount to fund an exchange programme.
It’s not a loan, so doesn’t incur interest and there is nothing to repay. Also, as a lump sum would be disbursed at the end of the day, there are no limitations as to which tertiary institution – local or foreign – that your child can enrol in. In comparison, CPF monies as well as the MOE loans can be used to fund courses only at approved institutions.
Start Planning Now
There are quite a few education savings plans available on the market and it’s important to note that some savings plans are non-capital guarantee. Selecting one can prove confusing and time-intensive. Financial advisory firms such as Fair Capital, which partners with major insurance providers such as Aviva, Manulife, Tokio Marine and NTUC Income, help to simplify the process by providing customised plans to meet each family’s specific needs.
The best path to take when it comes to saving for your child’s education really depends on your personal and family’s needs and lifestyle. One thing’s for sure though – start planning early!
Make an appointment with Fair Capital’s experienced financial consultants to find out more about the right financing options for your child’s education.
This post was planned together with the financial experts at Fair Capital.