Young Cadet -Career Starter Loan

[Mook1e]

My youngest daughter is approaching senior year at West Point and USAA is offering the Career Starter Loan ($25,000 - $35,000 at .5 to 2.5% interest)
https://themilitarywallet.com/usaa-starter-loan/
She has no debt, and is thinking of taking the loan to buy a used car and invest.
We've talked about it and I suggested a few options ($10,000 for a car, $5,000 emergency fund, and 20K invested in ETFs and CDs)
What say you?
Thank you for your opinions and advice.

 

[braumeister]

Sounds great to me. I would have loved such a deal when I started my military career. But why go for the top end of the range? Wouldn't that be most of a year's salary?

 

[pb4uski]

Take $35k. Worst case at 2.99% interest it is dirt cheap for a car loan or she can invest the proceeds in a money market fund (mine is currently paying 4.48%) and still come out ahead and have an emergency fund sitting there if she needs it.

Set up the loan payments on autopay so she doesn't inadvertently have a late payment and the 18% interest applies.

 

[Gumby]

^^^^^ What he said.

 

[Mook1e]

Sounds great to me. I would have loved such a deal when I started my military career. But why go for the top end of the range? Wouldn't that be most of a year's salary?

It would be close to a year's pay.

 

[HarveyS]

will she need a car where she will be assigned at graduation?

 

[38Chevy454]

I agree that it seems like fairly cheap money with respect to interest rate. Lot better start with some money than I did as a graduating poor college student. Although that was short lived since I had a good job out of college already set up before graduation. If she needs a car, then that is a good idea for a decent used car at that rate. She will need a car. Having an emergency fund is wise. Once she has a paycheck, put max in Roth, then balance can be in whatever risk tolerance works for her. Just be sure to make the payments on time, even add a bit when she can to pay down principle.

Sounds like she is off to a great start graduating from West Point.

 

[Jerry1]

I get the math and if she needs a car, this probably makes sense, but I am just having a hard time with the thought of going into debt right out of school and into the first job. I guess I’d do what is needed and not try to borrow in order to invest. If she can make payment and if she has discipline, which I suspect she does, she’ll build an emergency fund and an investment portfolio in short order.

 

[OldShooter]

Unlike USAA I don't think normalizing debt is a good idea and, like many here, I don't think borrowing money to invest is prudent. If she needs money for an economical used car, that might be a justifiable loan but the bank of mom and dad would probably be a safer source -- little or no opportunity to increase loan for baubles, beads, or vacations.

She is exactly in Bill Bernstein's target market: "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download) Give her the link and, better, buy her a hard copy.

Congrats to her and to you as parents.

 

[Aerides]

Secure the loan, but get out of school, get a full time job and situated with a place to live before figuring out about spending any of it - and zero of it should go to investing. Only to actual needs.

Horse before cart, etc.

 

[Bigdawg]

My youngest daughter is approaching senior year at West Point and USAA is offering the Career Starter Loan ($25,000 - $35,000 at .5 to 2.5% interest)
https://themilitarywallet.com/usaa-starter-loan/

When I commissioned 24 years ago we were offered 5K at 0% and another 5K at .5%. Almost all of us jumped right on it. As military officers you are most likely to have the sense to not go further into debt. We used out 10K for uniforms, setting up house at first duty station, etc... I would tell her to go for it.

 

[MC Rider]

I think OldShooter hits the bullseye.

 

[pb4uski]

When I commissioned 24 years ago we were offered 5K at 0% and another 5K at .5%. Almost all of us jumped right on it. As military officers you are most likely to have the sense to not go further into debt. We used out 10K for uniforms, setting up house at first duty station, etc... I would tell her to go for it.

+1. I'm presuming that the OPs daughter is financially disciplined.

 

[MC Rider]

Does the military teach their people about personal finance?


I went to school for business admin, and they did not teach Jack about that as far as I recall. Certainly did not mention the credit card trap.

 

[braumeister]

When I commissioned 24 years ago we were offered 5K at 0% and another 5K at .5%. Almost all of us jumped right on it.

Nice! When I was commissioned mumblemumble years ago we were offered nothing. I had to borrow $500 bucks to buy my first set of uniforms (above and beyond the $300 one-time uniform allowance we got). Had to buy a car, and showed up at my first duty station already deeply in debt. It took nearly four years before I was able to actually start saving money. Times have changed, and that's a very good thing!

 

[Gumby]

Lucky for me, the uniforms I wore at USNA were same ones I wore after I graduated. All I had to do was get new hat and collar insignia, new shoulder boards and have the sleeves on my service dress blues properly striped.

 

[CardsFan]

Secure the loan, but get out of school, get a full time job and situated with a place to live before figuring out about spending any of it - and zero of it should go to investing. Only to actual needs.

Horse before cart, etc.

Um, She went to West Point. I think the full time job is in the bag.

 

[SnowballCamper]

Take the loan. She'll have substantial up front costs to furnish a place to live, uniforms, transportation, etc. Set up the payment on an allotment so that it is paid off within the five year initial service requirement. She'll be making over $60k a year as a 1LT. With this stash in a savings account she can set up a significant savings plan to be on autopilot into the TSP and a Roth account.

The alternative of using credit cards or other loans to fund the necessities that a 1LT has to get aren't as good a deal, IMHO.

 

[JDARNELL]

I remember each year USAA would offer the cadets this loan. It's a great way to gain the loyalty of new officers as a lifetime customer. Many cadets would come to the Econ or Management department to ask our opinions. One year I had one cadet who took the money and used it as a down payment for a condo where she was from and rented it out for the years she was serving out her comittment. Other cadets wanted to take the money and day trade because they were convinced they could make bank. A few would buy new corvettes.

In the late 2000s the then USAFA Econ Department head created a finance guide to give to the cadets. Over the years other former PhD Econ Military Professors kept it going as a resource for the cadets. it is now available on Amazon for others to purchase. https://www.amazon.com/Basic-Person...1678239755&sprefix=len+caberra,aps,180&sr=8-1

I actually have all the previous versions that I have shared with my college age boys as a resource for them as it provides a good framework to talk finances. Because you know Dad knows nothing.

Full Disclosure: The original author passed away a few years ago. He saved my life in 2010. All the guys in the footnotes and Len the lead author kept this going in memory of the boss. They are all FI military retirees.

 

[HawkeyeNFO]

I remember getting something similar from Navy Mutual when I was at OCS. Take the max amount, and invest! In the next couple of years, she's most likely got some more training, then off for a deployment, so she won't really have much time to spend all the cash on stupid stuff. Most officers are pretty good about staying out of high interest debt. Not all debt is bad debt, for example my 2.75% mortgage.

 

[Nords]

We've talked about it and I suggested a few options ($10,000 for a car, $5,000 emergency fund, and 20K invested in ETFs and CDs)
What say you?

Seems like a good plan to me.

Writing as another service academy alumnus, if she can avoid her classmates' pressure to buy a new car and limit her spending to $10K, then she can certainly figure out how to split the other $20K between a total stock market ETF and a CD ladder.

With the $5000, she'll want to set aside a security deposit on an apartment.
She'll also want to have at least a month's expenses in her emergency fund for the usual DFAS pay problems.

The loan payments will be a bit of a thorn in the side of her O-1 budget, but when she gets that righteous O-2 promotion ("... with the really big bucks!") she can start thinking about whether she wants to pay it off early.

I also recommend JDarnell's financial guide, and she can probably find The Military Guide at the USMA library or her next military base's library.

(And before anyone else starts talking interservice-rivalry trash, my cousin and his spouse are USMA '07 and '09. They've already reached FI in their 30s on their [-]combat deployments[/-] high savings rate and his military pension.)

 

[OldShooter]

Is this the LBYM crowd or have we been infiltrated? I still think it is A Very Bad Idea to encourage a fresh grad who knows little about money to quickly incur unsecured consumer debt totaling a substantial fraction of her annual salary. USAA would love to have her hooked, of course, but is that really the right thing for her or for any fresh grad?

Would the forum consensus be different if she was considering approaching a credit union to borrow? a bank? a paycheck lender? Is it just the attractive interest rate that has caution being thrown to the winds?

I am still the lone vote for the bank of mom and dad if she needs money for a good used car. Beyond that, LBYM should be the training plan from the git-go.

 

[braumeister]

I don't think the idea is bad, I just don't like the size of it. Taking out a loan of roughly your first year's salary seems problematic to me. A smaller one sounds like a good idea, but this is just too big. Just because you can get it doesn't mean you ought to take it.

But I'm a geezer.

 

[MarieIG]

Is this the LBYM crowd or have we been infiltrated? I still think it is A Very Bad Idea to encourage a fresh grad who knows little about money to quickly incur unsecured consumer debt totaling a substantial fraction of her annual salary. USAA would love to have her hooked, of course, but is that really the right thing for her or for any fresh grad?

Would the forum consensus be different if she was considering approaching a credit union to borrow? a bank? a paycheck lender? Is it just the attractive interest rate that has caution being thrown to the winds?

I am still the lone vote for the bank of mom and dad if she needs money for a good used car. Beyond that, LBYM should be the training plan from the git-go.

My DS (USNA) did not take the loan. He mentioned a lot of his classmates bought new cars. He got married after graduation. He (and his family) live within their means. There have been no new cars, they budget and have even made furniture. His wife does not work outside the home as they have three itty-bitties. (She certainly works taking care of their kiddos.) He does max out his TSP yearly, and fund a Roth for his wife and himself. The grandparents contribute clothes and other goodies for the grands.

 

[Involuntary Retiree]

The loan the OP is referencing is known as the "cow loan" in USMA vernacular. In 2007, my son, who was a "cow" (a junior) at the time, used the proceeds to do the following: (1) buy his class ring (at West Point, this is a really big deal); (2) take a great, well-earned vacation with other cadets on Spring Break of his firstie (senior) year; and (3) fund his 2LT uniforms and the expenses of his first duty assignment. It also allowed him to build credit as he started "adulting" and "Army-officering."