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June 15, 2008

Plan and save early for your child's education

For most parents, the best gift to their children is a good university education. Lorna Tan looks at the costs
and the funding options.

The biggest financial priority that a parent typically faces - apart from his retirement nest egg - is his
children's university education.

Many parents underestimate the importance of planning and saving early for their children's education.

Even someone as financially savvy as Mr Arthur Lim, 40, who started planning early for his three children,
Ryan, 10, Roy, seven, and Renee, six, has had to review his options.

The chief executive of Alpha Financial Advisers started by saving for each child from birth, mainly in
endowment insurance plans and bank saving deposits.

But he realised that these investments did not grow very much and he decided to restructure all his
educational planning strategies to concentrate fully on a mixture of unit trusts, direct equities and
exchange traded funds.

In doing this, Mr Lim took the early redemption loss of the insurance endowment plans in his stride, and
stopped the contributions to the low interest earning bank deposits.

He believes he is now better placed to fund a good local or overseas tertiary education for his children.

Funding options

Insurance plans

Endowment plans, which are regular saving insurance plans with an expected maturity date, are very
popular.

These usually give higher returns than bank savings accounts and they provide insurance coverage up to
10 times the annual premium.

This means the child will still have money for his education should his parents die or become disabled
before the policy matures, said Mr Thio Eng Huat, ipac financial planning's vice-president.

Ms Anne Tay, OCBC Bank's vice-president of group wealth management, however, cautioned that any
early termination usually comes at a cost - you are likely to get back less than the total premium paid to
date. The returns from the policy may also be lower compared to a unit trust portfolio.

Unit trusts

A diversified unit trust portfolio typically has equities and bonds. A carefully constructed portfolio will
ensure returns are higher than an endowment plan's. But the risks are higher. There is no insurance
element, so experts urge parents to buy insurance such as term plans.

Central Provident Fund (CPF) Education Scheme

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With interest at 2.5 per cent, this is the cheapest loan. Also, repayment starts only after the student
graduates or leaves the course of study, whichever is earlier.

The maximum loan amount is 40 per cent of your accumulated Ordinary Account (OA) balance, or the
remaining balance in the OA after setting aside any sum reserved for housing or any other schemes,
whichever is lower and subject to the amount of tuition fees payable.

However, most OA funds would have been used for housing purposes and, hence, there is not much to
tap.

The loan is available only for full-time government subsidised courses leading to a diploma or degree at an
approved local tertiary institution. It is not available for overseas university courses, part-time studies and
second diplomas.

Repayment can be made in one lump sum or in monthly instalments over a maximum period of 12 years.

Mr Thio said parents should note that if a lower amount is set aside for the CPF Minimum Sum, they will
receive a smaller monthly retirement income from the CPF annuity scheme.

Borrowing from banks

Education loan

This option works better for late starters who were unable to plan earlier because of financial constraints.

Mr Thio said that it fills the gap between cost of education and available funds, be it cash or CPF monies
available.

But watch out for the higher annual interest repayment rates of about 6 per cent and processing fees of
around 3 per cent.

On top of that, you can borrow only up to six to eight times your monthly gross income, or up to a highest
loan quantum cap of $150,000.

Depending on the package chosen, principal and/or interest may be payable during the course of study.

Tuition fee loan

This is for local studies and there is usually no minimum income requirement, but the student needs to
provide a guarantor, said Ms Tay.

The maximum loan amount is 90 per cent of the Ministry of Education subsidised tuition fee for the entire
course of study.

The loan amount does not cover fees such as hostel fees, purchase of computer and personal allowances.

An attractive feature is that it is interest-free during the course of study, and the annual rate is pegged at
4.75 per cent.

Overseas Student Programme (OSP) loan

This is offered to full-time undergraduates of local universities to finance their overseas student
programme, which is a part of their curriculum.

For the National University of Singapore and Nanyang Technological University, OCBC is the exclusive
agent.

To apply for an OSP loan, full-time undergraduates will need the university's approval.

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It is interest-free during the course of study and the interest - at 4.75 per cent per annum - will commence
only upon graduation.

Scholarships

Scholarships typically cover 80 per cent to 100 per cent of tuition costs. Some also provide additional
subsidies for room and board or other living expenses.

However, scholarships are not open to all fields of study and are usually given out to a select few.

Bursaries

Bursaries are grants for financially needy students. In Singapore, the amount ranges from $750 to $6,000
and are given on a case-by-case basis.

Other options

These include renting out a room and increasing the mortgage on your house.

Ms Tay said: 'The idea is to channel some equity of your house towards your children's education. But do
note that by increasing the mortgage amount, you are also increasing your monthly mortgage repayment.'

Factors such as your age, income level, market value of your house and prevailing mortgage rate will
determine the available financing.

lorna@sph.com.sg

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