09 Jun 2020
I want my mum to have maximum CPF savings to draw from as I understand this is for her retirement. If I am taking money out to finance my 5 year degree, I'm sure this would have a ripple effect on her despite the 2.5% interest I would pay. Would just like to know the full picture so I know exactly what her and I would be getting ourselves into. Thank you!
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Ng Wei En
09 Jun 2020
Analyst at Mastercard
Hi there. First off, I just want to commend you for being so thoughtful and fillial towards your mum for thinking of her retirement.
Your concern is shared by the government as well which is why when you make repayment of the CPF amount used for your university tuition fees, you are paying the principal plus the prevailing CPF rate(2.5%) from the time it was withdrawn. This is to ensure your mum does not "lose out" in her retirement savings in her CPF due to this withdrawal.
Many will compare the option of taking a study loan from banks versus using their parents' CPF. I will go over some of the differences below:
Repayment period - tuition loan from banks typically let you stretch up to 20 years for repayment but do keep in mind interest is compounded. As for parent's CPF option, you have a maximum of 12 years to make the repayment
Interest rates - The interest expense of using your parent's CPF will definitely be lower assuming prevailing CPF rates of 2.5% remain unchanged versus study loan interest rate averaging about 4.5% or so you think. That is until we get to the next point.
Accrued interest - Here comes the pivoting factor. The major catch of using CPF is that the accrued interest starts rolling from the point you start your journey in University. In your case, by the time you graduate, you would have incurred 5 years of accrued interest. On the other hand, a study loan from the bank is interest-free during your course of study.
In short, the accrued interest incurred over the 5 years of your course of study based on the CPF loan would incur a greater interest expense than the study loan option which remains at zero interest at the point of completion of your degree. However, the higher interest rate of study loan compared to CPF prevailing interest rate will allow the interest expense of study loan to catchup and overtake that of the CPF loan as you stetch your repayment schedule over a longer period. Depending on how soon you wish to repay your tuition fees, the CPF option may or may not be cheaper than study loan.
Did some quick math and in your case you would have raked up approx $3.8k in accrued interest on a 5Y degree prog that cost 50k(assuming tuition fees are divided equally and paid at start of each year). This puts your oustanding loan at $53.8k upon graduation. Assuming you contribute $1k towards repaying your mum's CPF each month, it would take 4.8 years for your tuition fees to be fully repaid(according to CPF Board - Loan Repayment Period Calculator). In the case of study loan, it would take 4.6 years.
From here, you can see you incur about (0.2yearsx$1000) = $2.4k more in interest expense with CPF option for a repayment period of approx 5 years.
If you were to shorten your repayment period to 3Y and contribute $1.5k/mo, then the difference will be minimised but the CPF option will still incur $1k more in interest expense than study loan.
End of the day, the determining factor is really how much you intend to contribute per month towards repaying your tuition fees. As you can see, study loan from bank is still effectively cheaper if you were to repay over 3 years or more. Usually, it works out to be about 4 years or more for a 2-3 year degree program in order for CPF loan to be cheaper. In your case, 5 years of accrued interest in CPF makes it all the more difficult for CPF option to be cheaper. Taking into account everything, I would be leaning more towards taking a study loan from bank as it would typically be cheaper given a typical repayment schedule for most graduates. You can, of course, go to the extreme and repay your tuition fees within say 1 or 2 years and you will save a bit with the CPF option compared to study loan. However, this would mean you have to contribute at least $2k per month towards repayment.
UPDATE(18:58, 9/6/20) - Forgot to mention that your mum needs to set aside the FRS before she can use remaining savings in the OA when she turn 55 for the CPF option. As you mentioned your mum is 54, might want to take note whether your mum is able to set aside FRS if you are using her CPF to fund your tuition fees.
Seedly also did an article some time back about this topic HERE.
Hope the above helps.
It depends how much exactly your mom have in her CPF. If its above FRS and still have excess for your education, you can use the OA to pay for your school fees and afterwards you actually DONT NEED to pay back to CPF.
She is now 54, at 55, she can withdraw CPF above FRS thus the amount used for education can be wavied off together with the accrued interest. However, this means that she will have less payout for retirement.
You can also consider bank loan, since its interest free till your graduation. Then let the CPF OA earns 2.5% p.a. for 5 years and at the end of 5 years, borrow the amount from your mom's OA and pay off your bank loan fully. Since she can withdraw the amount after age 55.
After you started working, then pay back your mom slowly on the amount used to pay off your bank loan.
09 Jun 2020
Project Officer at Security Related
Take bank loan. Work during your uni years. Pay it off 1 shot after end of your uni. I did it before...
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