If you are a PTPTN loan holder and you read the news, chances are you’ve seen this table before.

**Table 1: Salary deduction percentage by income tier**

If this is the first time you’re seeing it, basically in late November 2018, the government announced that starting in 2019, they would start enforcing salary deduction to get more people to pay off their PTPTN loan. The percentage of salary deduction depends on how much you earn. Anyone who earns below RM2,000 is exempt from this new plan.

This announcement drew a lot of flak from PTPTN holders across the nation. Regardless of whether one has been diligent in servicing the loan or not, if you earn more, you’re punished with a higher rate of monthly installment. If you earn RM8,000 a month, 15% of that is RM1,200 a month! Walao, can buy house one. Some of my friends belong in the highest income tier and they have been faithfully paying off their loans every month – for their commitments to suddenly jump from RM300 a month to RM1,200 a month is a bit much la. If you earn less, you actually pay less over a longer period of time, but this goes against PTPTN’s aim of getting more people to pay up sooner. So what gives?

As per usual, when the people make a lot of noise, the government makes a quick U-turn followed by radio silence. No one knows what will happen in 2019. Continue as usual (as per the signed contract)? Salary deduction to take place anyway? If so, how many percent of one’s salary? 15%? 10%? 8%?

To add to all the confusion, the 20% discount offered to anyone who can fully settle the loan will end by 31 December 2018 (which is less than 2 weeks away at the time of writing). Click here if you want to see anxiety-inducing countdown to when the 20% discount will disappear, perhaps forever.

Being true masters of procrastinator my friends are (like me), they recently asked me if they should scrounge all the cash they can manage to settle the loan and get the 20% discount. Some of them have cash in their ASB accounts which is paying 7%-8% dividend each year. Is that 20% discount worth taking out money from your savings or investments like ASB?

This article will attempt to weigh the pros and cons and hopefully help you make a more informed decision.

*Note:** For anyone who wants to know how to determine if the discount is worth taking versus keeping up with monthly payments as usual (basically assuming PTPTN does not enforce the salary deduction plan), **Mr Stingy** wrote an excellent article on how to do just that: **Should You Pay Off Your Loan Early If Given A Discount?**My article will be different in a way that it takes salary deduction into account.*

To discuss the pros and cons, let’s take the example of a friend of mine, Zack who earns RM2,800 a month and has a PTPTN loan of RM20,000.

**Table 2: PTPTN repayment tenure by loan amount**

According to this table I got from PTPTN’s website, a loan of RM20,000 has a tenure of 10 years (120 months).

If things were to go as per the Ujrah contract, Zack’s repayment will amount to RM20,000 / 120 months = RM167 per month.

Now let’s look at Zack’s options starting January 2019.

**Zack Option 1: Pay 80% of the loan and enjoy 20% discount**

20% discount of a RM20,000 loan means that Zack gets an **immediate** **savings of RM4,000**.

But this savings is in the form of money you don’t have to pay in the future, so it’s not like you have cash in your hands that you can put in savings/properties/stock market to generate more income.

But another way to look at it is this – with the loan all paid up, Zack now has RM167 freed up!

What can you get for RM167 a month?

1) You can get a **RM30,000 ASB loan**. At a sustained 7% dividend per annum, your money will double every 10 years or so. That means after 20 years, you will have RM120,000 worth of money in your ASB provided you keep your grubby fingers off of the dividends and let them compound for 20 years.

2) You can qualify for an extra **RM30,000 worth of mortgage** if you’re into property investment.

3) **Meet a savings goal**. Instead of spending the extra RM167, put it in a fund for literally anything you want to do – investment lessons, language lessons, capital for business, books, travel etc.

4) **Purchase necessities in bulk**. You know how rich people stay rich? They have enough cash to benefit from economies of scale – that’s financial jargon for ‘when you buy things in bulk, the cost goes down’. Buy 36 rolls of toilet tissue instead of 2 rolls at a time. The cost per sheet of paper is lower. 0.2 sen savings might seem miniscule, but over the long run, it adds up and you’re building a good habit of not overpaying for something you can get for cheaper. Get a box of your favourite shampoo and body wash from online shopping instead of buying individual bottles from Giant. Buy 10 boxes of strawberry Pocky instead of 1. You get the idea.

5) **Pay off your credit card balance**. Seriously guys. I’m shocked people would even do this. The interest payment is daylight robbery. It’s cheaper to take personal loan than let your credit card balance roll over to the next month.

These are only some of the ideas I have. The RM4,000 is not the only upside of settling your loan. It is what you can do with the freed up RM167 every month from now onwards.

The downside is, you are now down RM16,000 cash.

** **

*Note:** I originally thought that to get the 20% discount, one has to pay 100% of the outstanding loan amount, and then the 20% discount will be deposited somewhere. But we contacted the PTPTN office and they confirmed that you only have to pay 80% of the loan amount. *

*DO email them first, they’re very quick at responding and they will give you all the necessary directions on how to proceed.*

**Zack Option 2: Don’t settle the loan, continue paying every month at 3% salary deduction and invest at 7% returns per year**

Since Zack earns RM2,800 a month, his salary deduction will be at a rate of 3% (refer Table 1).

His monthly repayment will be 3% x RM2,800 = RM84 per month.

At RM84 a month which is practically half the original repayment, it will take RM20,000 / RM84 = 238 months (19.8 years) to finish paying for the loan, doubling the original tenure of 10 years.

Now, since Zack did not fully settle the loan, he still has RM16,000 cash lying around somewhere.

On top of taking RM84 every month from this RM16,000 cash to service the loan, what if Zack were to invest it in ASB? Will he finish paying the loan first, or will the cash run out first? Take note that because there is no discount, he has to pay the full RM20,000. So that’s RM4,000 more than what Zack has right now.

The table below shows Zack’s invested principal of RM16,000 with RM1,008 taken out every year for loan repayment but also earning 7% income every year which is continually invested. Don’t worry if your calculations don’t match the table below as this is a summary of a much, much longer table I did on ** Excel which you can download here and key in your own numbers**. The reason why the original is so long is because I tried my best to emulate ASB dividend calculations, so it has to be on a monthly basis over the period of 19.8 years. That’s 238 tables just for this one.

So at 7% dividend rate per year, even while taking RM84 every single month from his RM16,000 principal amount, Zack’s money has managed to grow every year, enough not only to cover a full RM20,000 loan, but to even make an extra profit of RM19,186.02 at the end of 20 years!

So comparing this to settling 20 years ago, RM4,000 seems measly when you see the potential earning in the future.

Oh, and that column in pink titled ‘Loan Repayment PV’, what’s that? Is that important?

It’s more like a second layer of checking to see if investing the RM16,000 cash over settling the loan is a worthy move or not – honestly I learned this from Mr Stingy’s article I shared with you above and I love it!

PV stands for Present Value. Basically, it shows you the **current value** of the money you will be paying in the future. So according to the table above, you will be paying RM1,008 every single year for 20 years. How much does that RM1,008 really cost RIGHT NOW in today’s money?

To calculate Present Value, the formula is:

*PV* is present value, *FV* is future value, *i* is interest rate and *n* is number of years. Click here to find out how to use this formula.

Why is this important?

Because as a rule, it is better if you pay less money, right? But how do you compare the value of money today and 20 years later? How do you know which one is more or less in value? As everyone knows, RM50 today has smaller value than RM50 of 20 years ago.

That’s where the Present Value formula comes in. Money in the future is adjusted to show an amount that can be compared to today’s money.

So now that you have the present value of all the money you are going to pay for the next 20 years, you can compare if it is cheaper or more expensive than the RM16,000 you have to pay right now to settle the loan.

Settle loan right now: RM16,000.00

Settle loan in 20 years: RM10,637.42

The clear choice is to pay the loan in 20 years, because you are paying RM5,362.58 less in present value money!

Not only does the loan becomes cheaper by RM5,362.58, Zack also makes a profit of RM19,186.02 after paying off a RM20,000 in full!

Ain’t compound interest beautiful when it’s working in your favour? Seriously guys, pay off your credit card balance every month. That’s compound interest working *against* you.

**Zack Option 3: Don’t settle the loan, continue paying the loan at 3% salary deduction, but invest at a lower rate of 3.5% returns per year**

Zack finds out he’s not Bumiputra and cannot invest in ASB and get 7% returns per annum, so being conservative, he looks for fixed deposit rates. Assume everything else remains the same as in Option 2.

Let’s take a reasonable 3.5% for a 12-month fixed deposit and go with this for 20 years.

The table will look like this:

Fuyyoh! Luckily for Zack, his small salary that never increases after 20 years has a silver lining – the monthly repayment is so small that even at a measly investment rate of 3.5% per annum, his money still has a chance to grow faster than the RM1,008 being taken out every year.

Even after paying the full RM20,000 loan, his investment will have yielded him an extra of RM2,950.97 after 20 years. Got extra pocket money some more.

As a double check, even looking at present value cost of loan repayments (the pink column), the RM14,245.69 is still RM1,745.31 cheaper than paying RM16,000 to the government today.

It’s better not to settle, even if Zack just puts the money in fixed deposits.

**Zack Option 4: Don’t settle the loan and everything remains the same (as per the original contract)**

This option assumes the salary deduction does not happen and Zack continues paying his RM20,000 over 120 months = RM167 per month. He invests the RM16,000 cash he has at a rate of 4.85% per annum over 10 years.

The table will look like this:

Why 4.85% p.a.?

Because if it goes below that, his principal amount would have gone into the negative (deficit) and investing the RM16,000 will no longer be a good decision. At a sad profit of RM55.76 after 10 years, I personally prefer to just settle the loan right now and free up my mental space to think of more productive things, like how to be a better investor.

**SUMMARY for Zack**

**Option 1: Pay 80% of the loan and enjoy 20% discount**

- Save RM4,000
- Free up RM167 every month to do whatever Zack wants with it
- Lose RM16,000 cash
**Thoughts:**Only settle if there are no better options.

**Option 2: Don’t settle the loan, continue paying every month at 3% salary deduction and invest at 7% returns per year**

- Pay RM20,000 loan in full (no discount) over 19.8 years
- Make a
**profit of RM19,186.02**from investing his RM16,000 cash - Loan gets stretched from 10 years to 19.8 years
- Monthly repayment gets slashed from RM167 to RM84 a month (assuming his salary doesn’t go up in 20 years)
**Thoughts:**Keep the loan.

**Option 3: Don’t settle the loan, continue paying the loan at 3% salary deduction, but invest at a lower rate of 3.5% returns per year**

- Pay RM20,000 loan in full, but…
- Still make a
**profit of****RM2,950.97**from investing his RM16,000 cash - Loan gets stretched from 10 years to 19.8 years
- Monthly repayment gets slashed from RM167 to RM84 a month (assuming his salary doesn’t go up in 20 years)
**Thoughts:**Still keep the loan.

**Option 4: Don’t settle the loan and everything remains the same (as per the original contract)**

- Except that his investment CANNOT go lower than 4.85% per annum if he doesn’t want to be in the negative
- Total profit of RM55.76 after 20 years of investment
**Thoughts:**I would settle and take the discount.

**Conclusion:** If the salary deduction plan were to take place, Zack should definitely not settle and draw out the loan as long as possible. The low repayment rate will ensure that his capital of RM16,000 has time to grow over the years, yielding him more money than if he were to settle right now and getting a relatively small discount of RM4,000.

BUT if status quo were to be maintained (meaning no salary deduction), then **Zack should settle the loan** and take the 20% discount UNLESS Zack is convinced that he can **consistently invest at a rate of at least 4.85% or higher** every single year for 10 years.

—————————————————————–

But wait! What if you’re not Zack? What if you earn much, much more which means you get hit by a higher percentage of salary deduction?

Let’s take my friend Harry who earns RM8,000 a month and has a PTPTN loan of RM50,000. That means according to his original contract, he has 20 years (240 months) to pay off his loan, which brings his monthly repayments to RM208.33 per month.

**Harry Option 1: Pay 80% of the loan and get 20% discount**

To settle 80% of the loan, Harry needs RM40,000 cash to get RM10,000 discount.

He also frees up RM208.33 every month to do whatever he wants with it.

**Harry Option 2: Don’t settle the loan, continue paying every month at 15% salary deduction, and invest at a rate of 7% p.a.**

At 15% salary deduction of a RM8,000 gross income, monthly repayment comes up to RM1,200 a month.

RM50,000 loan / RM1,200 monthly repayment = 42 months (3.5 years).

Let’s see how much RM40,000 cash can grow in 3.5 years when invested at 7% per annum but gets RM1,200 taken out every month to pay for the loan.

The answer is *nein*! Zip. Zilch. All around bad idea. Even at a generous return of investment rate of 7% per annum, Harry’s principal starts going into the negative in the fourth year.

In order to NOT take loses with this approach, Harry’s investment has to **consistently return a AT LEAST 15% per annum**, which is only possible if he is an oracle or if he is running a Ponzi scheme.

Whichever way you look at it, it’s a bad idea. Definitely SETTLE AND TAKE THE 20% DISCOUNT!

**Harry Option 3: Don’t settle the loan, continue paying every month at a lower 7% salary deduction, and invest at a rate of 7% p.a.**

While salary deduction *is* a possible future scenario, I think we can all agree that 15% of salary is a ridiculous amount by any measure. If they do proceed with the salary deduction, it is quite likely that they might bring down the percentage to let’s say 7% of gross income.

7% of RM8,000 gross income brings the monthly repayment to RM560.

RM50,000 loan / RM560 = 89 months (7.4 years).

Can the invested money grow enough in 7.4 years at an investment rate of 7% to cover the cost of taking RM560 every month?

The answer is just about. After 7.4 years, Harry manages to get away with RM1,012.31 profit.

So unless you have access to ASB or you’re an experienced investor, you can try investing it. If not, it’s better to settle and take the 20% discount. Fixed deposit is not gonna cut it in this scenario because **if the return on investment dips below 6.6% p.a., the investment will suffer losses**.

**Harry Option 4: Don’t settle the loan, but Harry can only invest in fixed deposit at a rate of 3.5% per annum – what is the maximum salary deduction percentage can Harry take?**

This scenario is a bit different. We start with the assumption that the BEST investment return Harry can get is 3.5% per annum from fixed deposits. How much can Harry afford to pay as a percentage of his salary if he does not want his investment to end up in the negative?

The answer, according to the table below, the highest salary deduction that Harry can take is 3% in order to keep his investment profitable.

3% of RM8,000 is RM240 monthly repayments. RM50,000 / RM240 = 208 months (17.4 years).

That means, if the salary deduction is going to be 4%, 5%, 6% and above, Harry’s investment will turn into losses. In this case, it’s better not to invest the RM40,000 cash, settle the loan instead and take that RM10,000 discount.

**Harry Option 5:** **Don’t settle the loan and everything remains the same (as per the original contract)**

If Harry does not settle and sticks to the original contract, that means a RM50,000 loan gets a 20-year tenure (Table 1).

The monthly repayment is RM50,000 / 240 months = RM208.33 per month.

As shown by the table below, when the loan is stretched to 20 years, the RM40,000 cash investment not only has more time to grow; the lower monthly repayment is less damaging to investment earnings, allowing it to be profitable.

So if nothing changes, then keeping the loan and not settling is the better choice for Harry.

**SUMMARY for Harry**

**Option 1: Pay 80% of the loan and enjoy 20% discount**

- Save RM10,000
- Free up RM208.33 of monthly commitment
- But lose RM40,000 cash
**Thoughts**: Settle if there are no better options. If you have to borrow the RM40,000 cash at a cost, don’t even consider settling.

**Option 2: Don’t settle the loan and continue paying every month at 15% salary deduction, and invest at a rate of 7% p.a.**

- 15% salary deduction of Harry’s RM8,000 gross income equals to RM1,200 monthly payment
- 7% p.a. return on investment is not enough to stop Harry’s 50,000 investment to turn into a loss
- To turn a profit, Harry needs a sustained return on investment of 15% p.a. which is a long shot
**Thoughts:**A clear sign to settle and take the 20% discount.

**Option 3: Don’t settle the loan and continue paying every month at a lower 7% salary deduction, and invest at a rate of 7% p.a.**

- 7% of RM8,000 equals to RM560 of monthly repayments
- 7% p.a. return on investment is good enough to turn a profit
- If the rate of return dips below 6.6% p.a., the investment will turn into a loss
**Thoughts:**Harry should settle the loan now and take the 20% discount if he cannot find investment that can consistently give returns above 6.6%.

**Option 4: Don’t settle the loan, but Harry can only invest in fixed deposit at a rate of 3.5% per annum – what’s the maximum salary deduction percentage can Harry take?**

- Harry can only invest in fixed deposits at a rate of 3.5% p.a.
- Which means he can only take a maximum of 3% of salary deduction, which amounts to RM240 of monthly repayments
**Thoughts:**If Harry anticipates his salary deduction in 2019 will be anything above 3% of his gross income, it is better to settle the loan now and take the 20% discount.

**Option 5:** **Don’t settle the loan and everything remains the same…**

- At status quo, the repayment is only RM208.33
- RM208 taken out monthly is low enough to not shrink the RM40,000 principal too quickly
- The long tenure of 20 years will allow the principal to generate enough income to cover the full RM50,000 loan and still turn a neat profit of RM7.552.01
**Thoughts:**This is a clear sign to keep the loan and invest the cash you have instead.

**Conclusion**

If you made it this far, I’m amazed and thank you for reading.

The PTPTN loan is a super low cost loan with the only cost imposed on borrowers being the 1% flat fee. That’s the best part – **there is no compound interest**.

It means you can take 3 years to pay or you can take 20 years to pay – the loan does not grow in size. I don’t know where else you can get this kind of loan except from the Father-Mother Fund of Eternal Love. Personally, if my monthly repayment is reasonable, I would just keep the loan.

But as you can see from the examples in the article, if your salary is on the lower side, keeping the loan seems to be the more attractive decision, whereas if your salary is on the high side, it’s risky to keep it and much better to settle now. This is because with higher salary, your monthly salary deduction will be huge, which lessens the loan tenure, which means if you choose to invest your principal, it won’t have time to outgrow your expenses. The opposite is true for low salaries.

The government made another announcement recently that they are going to need between 6 months to 1 year to determine the appropriate methods to encourage more students to pay up. So until they announce anything, we won’t know what’s going to happen.

The point of this article is to help you think about possible future scenarios and how it affects you. Whether you take the discount or not depends entirely on your risk appetite, investment preferences, your salary and what you think can happen in the future. Now that you are equipped with extra methods to weigh the pros and cons, hopefully it will help you make a better decision for your financial future.