Recently, I met a friend named S. she complained about that after 3 years working in Singapore, she has managed to pay only half of tuition fee loan, which valued ~48 000SGD after her graduation.
She is a carefree person. She never cares about how much she spends each month. In a conversation, she revealed that she purchased an saving insurance plan. It promised to give her 6% annually interest rate. Given the fact that the TFL interested rate is 4.75%, she assumed to make a positive margin of 6%-4.75% = 1.25% interested rate.
I am shocking after listening her story. Tuition Fee Loan, a big sum of debt, was not addressed properly in my friend’s financial projection.
Firstly, tuition fee loan is a good loan for investment of degree. It is the prerequisite entry for many job in corporate companies. Those HR people, they look at academic performance and perhaps which school or degree . A loan sounds like good loan when it provide free interested rate. In fact as a student, I never think too much about it. If I don’t pay the interest, why I need to care.
Secondly, it is bad debt after graduation. There is interested rate, thing starts to change. I have to pay monthly instalment. I have no way to escape from it. Imagine if you borrow money from a bank, you still have liability to make your business profitable and hopefully at the end of day, you are able to pay all. For TFL, it is a bit different. The interested rate may be not high, but it is accumulated over time. I have no way to escape from that. Even I leave Singapore to live in Vietnam, the bank will chase after me if I don’t pay the minimum monthly amount. Sounds fair enough?
In the case of losing money of building a business, I may declare bankrupt and that is it. For TFL, I have to pay back the loan until it is fulfilled. To another extent, TFL is the worst loan ever if you don’t realize its accumulating interest.
So that is reason why if you financial smart, you should never take bad debt into your long term calculation. You should quickly resolve the loan as soon as possible. Set the monthly instalment as high as you can adapt. Then after fully paying the loan, you can start invest into other saving or endowment plan. Basic insurance protection is fine, but saving plan should not be applied at the beginning. Otherwise, you may end up like my friend’s situation.
P/s: I am not a financial consultant. I just read “Rich dad poor dad” of Robert T. Kiyosaki. This book give me many financial advice.