1. USAA will be at USAFA on 4 September. Please click the link for more information.

Cadet Loan Questions / Info

Discussion in 'Air Force Academy - USAFA' started by Bundy, Feb 18, 2011.

  1. Bundy

    Bundy Member

    Joined:
    Jul 16, 2009
    Messages:
    66
    Likes Received:
    0
    Just curious to learn more about the cadet loan program where cadets are eligible to borrow $30,000+ at (approximately) 1/2% interest. Questions are...

    - What is the term of the loan (over what period of time must they pay it back)?

    - What are the loan proceeds typically used for? Do some borrow to invest?

    - When do the cadets declare their intentions to borrow?

    - Do a lot of cadets decide to borrow the entire amount?

    - Do they declare just once in the beginning how much they wish to borrow or can they borrow additional funds over time?

    - Do the loan payments ever present a financial challenge based on their 2nd Lt. pay?
     
  2. Bullet

    Bullet Member

    Joined:
    Jan 9, 2008
    Messages:
    946
    Likes Received:
    21
    OK, saw these questions on USAA's "deal" for AFA cadets, and I have to ask the question: WHY the Heck would you want to add 30K of debt when your a 2LT?

    Unless the answer is: home downpayment (which I would barely accept as a good reason, and also cousel against for a multitude of reasons) I would recommend that a young person who will be in your situations at graduation (garuanteed job with a decent slaary, limited debt, most likley single, definetley no young dependents for at least a couple of years, etc) should avoid this much debt rigth off the bat at all costs.

    Want a nice new car? Buy used and pocket the cash. What other toys you got in mind that you need 30K at age 22?
     
  3. Christcorp

    Christcorp Member

    Joined:
    May 21, 2008
    Messages:
    4,608
    Likes Received:
    353
    Amen Bullet. When my son was approached about the loan, this year, we spoke about it. First thing out of his mouth was: "Unless I could find a decent investment for it, why in the world would I want to borrow that kind of money?" I was so proud of him. You can't drop that large a sum into an IRA of any kind. And pretty much any other short term investment would incur taxes on the gains. needless to say, he didn't take the loan. Even with spending for enjoyment and day to day existence, if a cadet can't save $10,000 in their time at the academy, then they really need to learn about finances. A $30,000 loan would be the last thing they need to incur.

    And definitely, a used car is the answer. Work your way up to a new car. In the civilian world, one of the most disappointing thing I've seen in young people, is their attitude that they should instantly have all the possessions and luxuries that they grew up with; which is actually their parents. Cars, big screens, fastest internet, cell phone with Iphone and data plan, etc... We use to have a saying about spouses. "If the military wanted you to have one, they'd issue you one". Well, when I came into the military, the first thing I accepted, was that my "Standard of Living" was now MINE. It wasn't my parent's standard of living, that I was ALLOWED to enjoy. I realized I was starting off at $0. I started with the immediate expenses. Food, shelter, clothing... Everything I NEEDED; the military either gave to me or gave me a salary in which I could pay for them. Each month, I became more accustomed to my paycheck. I then learned how to set aside some for luxury. And when my car broke down, and I didn't set some money aside for emergencies, then my car sat in the parking lot for a month until I could afford to fix it. "I saved money by learning how to do such things myself". Now, after retiring from the air force, and investing well, I can honestly say that I could literally stop working and retire full time and live off of my investments and other income. I'm only 49, so I choose to continue working. But it's nice to know I don't have to.

    If the air force truly cared about the cadets, they wouldn't allow such a loan program. Like you Bullet; I can't comprehend 1 single reason that any new butter-bar would need a $30,000 loan. And if they were foolish enough to not put at least $10,000 away in 4 years at the academy, to start them off, then they've shown that financially they are still pretty irresponsible. Incurring a $30,000 debt is the last thing they need. But if they still need a loan; let them get a 5,6,7,or 8 percent loan. They'll learn quick to become fiscally responsible. I too can not think of one reason to need a $30,000 loan as a new O-1.
     
  4. Pima

    Pima Parent

    Joined:
    Nov 28, 2007
    Messages:
    11,752
    Likes Received:
    378
    Rule of thumb any financial advisor will tell you...PAY yourself 1st. That means invest/save, as CC has stated.

    You are young, but you could be like Bullet. Graduate from college with no bills, take a loan for that new car, fall in love, marry a girl who had to take college loans. In our 1st yr of marriage we lived in NM, ID and England. Hard for her to get a job if you are moving constantly, yet that student loan payment is due.

    On top of that when you move the AF will offer you that 12 mos interest free loan up to 1 months salary.

    Now, you have that 30K debt, her student loans, and the AF 12 mos loan. It will be very painful fiscally.

    Finally, as stated on another thread, if you leave the AF, USAA can jack up that rate from 0.5% to the current APR.

    I agree with CC. The person that has fiscal guidance will tell you if you are doing this to buy the 2011 Corvette, it would be wiser to buy the 2009 or 2010. You will still get the WOW factor, except at a much cheaper price.

    If you are doing to invest...look at the stock market now. Had you invested 30K in Jan 2008, you would see that it is still below that number today, 3 yrs later. Yet, for 3 yrs you have been paying interest on that loan, which is not tax deductible.
     
  5. Bundy

    Bundy Member

    Joined:
    Jul 16, 2009
    Messages:
    66
    Likes Received:
    0
    Agreed that it makes no sense to burden a college graduate with any unnecessary debt. What I'm really wondering is whether anyone has taken advantage of this program to borrow, say, $15K at 1/2% interest to invest the proceeds for retirement?

    In this example, paying $253 / month would pay off the loan in 5 years. My guess is that this is probably comparable or lower than a lot of college graduates pay on student loans. With no additional payments or contributions after 5 years and at an 8% annual compounded return, the original $15,000 investment made at age 23 would grow to $176,000 by age 55 or $258,000 by age 60. If the average rate of return is 9% then you would have $236,000 at age 55 or $363,000 by age 60.

    Assuming the cadet has the discipline to stick to the plan, this appears to me to be smart use of low interest money. Yes / no? Has anyone out there had a cadet who has done this or heard of someone who has?
     
  6. HNeedle

    HNeedle Member

    Joined:
    Jan 2, 2009
    Messages:
    324
    Likes Received:
    0
    havent been on here in a while, but i thought i'd pitch in on this..

    i'm a 2dig now. USAA and navy federal usually offer the loans towards the beginning of your junior year, after you've committed. this year's loan was 35k at .5% interest. it's paid back over 5 years at somethin like 550 a month, depending on how much you take out. you can start paying off while you're a cadet, if you want. however the official payments dont start til augus/september after you graduate.

    My dad raised the same questions as alot of these parents have; while i too was skeptical about getting the loan at first, i realized there's a lot of potential for it. i already had an IRA, so i maxed out both last year's and this year's contributions. i've invested more of it in other places that has been doing quite well and has already made back all the interest i'll ever have to pay on the loan. the rest i'm using to get my PPL at the aero club on base, which is something i've wanted to do for years now. i didnt take the entire amount, and i dont plan on spending/investing it all, which means i can basically pay USAA back what i didnt use and chop months/years off my payment.

    all in all, be responsible with it. you can be really smart, or you can be really stupid. i think it's an excellent way to get a head start on investing/retirement, which is what about 60% of my friends did with their loans. the rest dont know what to do/went and got that new car. sure helps too when almost all the econ teachers here / everyone at USAA is willing to help you out with advice and planning for free.

    bottom line: if you can be responsible, you'll never get another deal like this in your life.
     
  7. Christcorp

    Christcorp Member

    Joined:
    May 21, 2008
    Messages:
    4,608
    Likes Received:
    353
    Just a quick note for those interested in "Investing" the loan. The only real tax deferred/free future retirement type investments you can put money into, is an IRA. But unfortunately, you can't just dump $30K into it. The max you can put into a ROTH IRA is $5000. So; if you took the loan say in the Fall; you could put $5,000 into your ROTH. Wait a couple months, then in January you can invest another $5,000. Now; what do you do with the remaining $20-$25K? You could stick it in the bank if you're disciplined, and throw $5,000 into your ROTH IRA each year for the next 4-5 years. Well; without getting complicated, if you can afford the $550 a month payback on the $35K loan for 5 years, then you'd be able to put $5,000 per year into the ROTH IRA.

    And the $35K loan; even though it's paid in 5 years, HAS to be more than $550 per month. (With 0% interest, $550 x 60 months, is only $33,000) But either way; the monthly payback on the loan will pretty much equal what you would have done if you were able to SPREAD out the $35,000 over 5 years and invest it. Because you can't invest it all at once. Not for a retirement account. You could do taxable investments like CD's and such, but they aren't paying anything worth investing in.

    I'm still with Bullet on this one. There really isn't anything to really need that loan for. You can save enough in your first 2 years at the academy, along with any money you might already have, to get a decent used car in your 3rd year. You don't need a lot to start off your first apartment when you get to your first base. Not unless you have to buy the best and newest of furniture, tv's, computers, etc... But hey; I remember making some pretty stupid financial decisions when I was right out of school too. Sometimes it's like a hot stove. You sometimes have to let the little kid touch it and get burned. Sometimes they just don't want to listen. And that's cool. it's all part of growing up.

    I will say one thing, and people can agree, disagree, heed, or not..... It is ALWAYS BETTER if you could theoretically live your entire life, saving for what you want to buy, and NEVER borrowing money on a loan or with credit cards. it is ALWAYS BETTER!!! That's not to say it practical. Saving to buy a house is almost impossible. Saving to buy a brand new car also is difficult. But except for the house, which you shouldn't need for many years, you could START with a nice used car that you don't have payments on; then put aside what your payments would have been for a few years. Then; when you want that brand new $25-$30K car, you'll be able to put down 50%+ down on the car, and not have that very large payment. Anything else, you can easily wait a few months, and save to buy it instead of charging it or getting loans. And then when you're in your lat 40's like me, you can go months without even balancing your check book or bank account. "LITERALLY"!!! I can honestly say that it would be very difficult, if not almost impossible, to bounce a check or have a debit card reject. My ONLY REGRET!!!! is if I'd had learned and knew this earlier; say at your ages; I could have walked out of the military after 20 years, and would have been 100% debt free; instead of having to wait this extra 10 years. 10 years doesn't sound bad, and it isn't, but I think of some of the things I could have done with my kids if I didn't NEED to work. Anyway; you all will do fine.
     
  8. Packer

    Packer Member

    Joined:
    Feb 11, 2011
    Messages:
    1,877
    Likes Received:
    3
    The Borrower is Slave to the Lender.
     
  9. Christcorp

    Christcorp Member

    Joined:
    May 21, 2008
    Messages:
    4,608
    Likes Received:
    353
    Why do you think so many politicians/bureaucrats push social programs so much. Do you really honestly believe that these people actually care about you? They NEED you, to NEED THEM. That's their power base and wealth. The more people in poverty, the better for them. Same with the banks, credit card companies, etc... Do you think USAA or any of them REALLY CARES ABOUT YOU??? No, they don't. They don't care if you fail out of the academy or receive a court martial. It's not an "Individual". It's a corporation. They want your money. And they want it for years to come.

    The saddest thing is how everyone in the country is basically talking about how far our country is in debt and how irresponsible our government it. Guess what. If every American would stop accumulating any additional personal debt; saved for what they wanted/needed;we could actually FORCE the economy to correct itself. How? There would be more liquid cash in the financial institutions, but it would be the individual's money instead of the bank's or government's. That means retailers and such would still be making the same amount of money; employment would go up because the consumer could afford more. It would just be the individual's money that the retailer got instead of the banks through credit cards. Everyone complains and whines about the government; about insurance; about credit cards and banks; etc... Guess what? It's WE THE PEOPLE who can change it.

    Bottom Line: Getting a loan should be the very LAST option. And Screw that whole: You need to take loans to improve your credit score. No,,,, You DON'T. Don't believe the crap on TV. Walk into a car dealer or Realtor wanting to buy a car or house. You show the bank that you're putting 30-40% down on a new car loan; or 20% on a house because you've been saving for 15 military service years, and you'll find that you'll get any loan you want, at great interest rates. Make loans your very last choice.
     
  10. Packer

    Packer Member

    Joined:
    Feb 11, 2011
    Messages:
    1,877
    Likes Received:
    3
    Christcorp: We think alike. I agree with everything you said. It did take me a few mistakes to learn the lesson though. When you are young it is hard to discipline yourself to not do what everyone else is doing.
     
  11. Stealth_81

    Stealth_81 Super Moderator Moderator Founding Member

    Joined:
    Jul 20, 2006
    Messages:
    1,278
    Likes Received:
    160
    I'm not trying to argue anyone's point here, but Bundy asked a specific question above and I will answer it.

    Our cadet did take the loan in it's full amount of $35,000. He funded his IRA for 2009 and 2010 with part of it. The balance, he invested in several funds that he had investigated thoroughly. Also, remember the timing here was perfect for the class of 2011. Anyone who invested their loan at that time hit the one of the lowest points in the market in recent years.

    So, his investment has grown substantially in the last two years, and he has an incredible nest egg for a 21-year-old, while paying 1/2 percent on the money. He is aware of the risk, and knows that if the market tanked again, he would lose. He also knows that he has the option of using the money to pay off the loan immediately after graduation if he chooses, and pocket the gain (minus taxes). He is very savvy in financials and has gotten professional advice when needed. He bought my used truck for $5000 and plans to continue driving that until at least after UPT.

    Now, he also has classmates who have taken the loan, bought a new Camaro SS (sounds cool, but not a great choice in Colorado winters), went to Riveria Maya for spring break, or bought a $15,000 engagement ring. They now have $7.00 left of the original money, plus a $300/mo car insurance bill. There are good and bad choices to be made.

    I am not advocating for or against the loan, it is a choice that every cadet has to make. I am just relating the story of my son to answer Bundy's question.

    Stealth_81
     
  12. Christcorp

    Christcorp Member

    Joined:
    May 21, 2008
    Messages:
    4,608
    Likes Received:
    353
    No doubt stealth. there are definitely some ways. On the other side of the coin; if the loan amount will cost you $600 per month for 5 years. ($35,000 with 0% interest, divided by 5 years, is $583 a month); if you simply took that $600 per month when you graduate and start investing it, you can actually do better. With dollar cost averaging, (Meaning investing monthly instead of yearly or longer lump sums), you can easily make up the 18 months that you invested earlier. And; the advantage of investing $600 monthly, instead of the lump sum say of $35,000 and paying the $600 pay over 5 years, is that the $600 monthly expenditure isn't MANDATORY. If god forbid, a family member died and you were overseas and needed a quick $3,000 for you and your family to fly home, you could simply charge it, and use the $600 a month you were investing, to immediately pay off the credit card. In other words, you preset yourself with the $600 a month Payment. It's used for investments, or it's available for car repairs, emergency plane fare, or other unexpected expenses.

    But this too takes financial discipline. Just like those who take the loan. Not only do you not just blow the $35,000; but once you start paying back the loan, do you make that part of your permanent budget so when the loan is paid off, you CONTINUE to put that money to good use, (Being you've gotten use to not having it to spend); or do you give yourself a $600 a month pay raise and spend it each month on a higher standard of living.

    I try to teach my kids 3 minimums when it comes to investing. 1) Every payday; take 10% off the top and put that aside for emergencies and unexpected expenses. If it gets large enough, it can also be used for high cost things like vacations. 2) Take another 10% off the top and invest this in LONG TERM retirement type investments. When you get pay raises, the 10% obviously goes up. Do it based on percentage, not a "DOLLAR AMOUNT". if you get a lump sum for some reason, take the 2 10% deductions for the same things. 3rd; Then, after the 20%, use the rest to pay all your bills. Whatever is left, is your spending money. Put some of that aside as you see fit to "Save" for those things you "WANT". E.g. new car, 2nd car, christmas presents, new tv, playstation, S&W M&P15 AR15 rifle, "Hee Hee... I love my toys". etc...

    Point is; if you can set up a standard budget, similar to this, you'll never have to charge to buy anything. "You might charge for convenience, and pay it off when the bill comes in, but that's totally different". There's a lot of ways to save, invest, and keep yourself financially stable and out of debt. There's no only 1 right way. Stealth's son's way is good. So are some of the other suggestions. Depends on your level of risk. On my mortgage, I pay approximately $500 extra every month towards the principal of the loan. Some, especially banks, say that I could refinance and pay what I'm paying each month anyway, and could finish the loan off approximately a year earlier than I'm doing it now, by paying the additional $500. what they don't tell you is that you have to pay additional fees to redo the loan. When you include the additional $3,000 that it could cost me to refinance the loan; plus the inconvenience if i have a financial emergency, that I can't go back to paying the mortgage at the $500 LESS rate until the emergency is over. I am not required to pay the whole thing each month. Of course the bank wants your money. They RELUCTANTLY agreed that financially, my way was better. Of course their argument is that "MOST PEOPLE" aren't disciplined enough to continue making those additional principal payments. Well, I am. I could pay off my mortgage today if i wanted to. I only keep the small mortgage alive to free up my additional money in the bank/cd's/etc... and to keep the loan alive, in case I had an emergency and wanted to borrow back some of my equity.
    Anyway; best of luck to you young investors. Set a budget. set a plan. Stick with it, and when you receive promotions, raises, lump sums, etc... make sure you don't just blow the additional income. If you keep everything at a "Percentage" and not a dollar amount, you'll still have more spending money, but you'll also have more investment and emergency money.
     
  13. eagle36

    eagle36 USAFA Alumnus

    Joined:
    May 5, 2007
    Messages:
    295
    Likes Received:
    0
    I also disagree with what appears to be the majority here. For c/o 2010, we were offered $30,000 at 1.49%. I, along with many classmates, took the loan. Now granted, I agree that blowing the money on cars, TVs, game systems, and other gadgets is not a smart idea. However, if you are smart, then I find it silly not to take the loan.

    I took $10,000 and immediately invested in a roth IRA (took the loan in Feb 2009, so it counted for 2008 and 2009 contribution). I then took another $10,000 and put it steadily into a mutual fund. The last $10,000 i left sitting in savings to do whatever with, and it turns out I've used it to continue to contribute to my IRA (2010) and then have that "2-months pay" saved that generally is a good idea to have in case of an emergency.

    I had to make my first payment this past summer, July 2010. Even after about 1.5 years of interest without paying, the first payment basically covered all of the interest that had accured. I am paying it off each month out of my pay as a 2Lt. It's basically the same as "paying myself first", except that instead of starting with $0 in funds, I am starting with a very strong basis. I have made well over the interest I have accured with just the mutual fund. I find myself off far better than I would be without the loan.

    Of course it comes down to personal preference, but as long as you're not stupid with your money, then I would recommend the "cadet loan" to everyone who can.
     
  14. Christcorp

    Christcorp Member

    Joined:
    May 21, 2008
    Messages:
    4,608
    Likes Received:
    353
    Congrats eagle. It definitely can be a useful tool if used correctly. And I'm not saying that a person should not consider the loan. Only that if you are "Disciplined", you can do pretty much the same thing, without taking the loan. what you lose in not having the initial investment, you gain in other areas such as convenience and flexibility. i.e. gold, silver, (TAX FREE and NON-Reportable for amounts bought/sold under $10,000 per month), many different areas of investing; suspending investments for a month or two during hardships; etc... With the loan payment, there is no flexibility. You WILL make that payment each month. And your initial investment is where it is, and that's that. Again; no right or wrong way. Just that taking the loan isn't an automatic "Great Deal" that is the best investment for everyone. Even for those who are disciplined.
     
  15. hornetguy

    hornetguy USAFA Cadet

    Joined:
    Jun 9, 2006
    Messages:
    2,280
    Likes Received:
    104
    WOW! I'm in the same boat as eagle.

    If you (general statement) are someone who can't manage money, then don't take it. That applies for any loan for that matter!

    For anyone with some fiscal responsibility, this was such a great deal. 2010 got the WORST deal in years, and that was 30K at 1.49%! The norm is less than 1% interest. I can beat the loan in my savings account or a CD in most years! If you don't blow it all at once, it is wonderful. Also, for cars, for those that were smart (and many were) who went and paid <15K for their car, they are now only worrying about 1.5% or less interest per month that they can start repaying as a LT rather than 7-15% on a car loan. Big savings there.

    I put mine in Roth IRAs and have made bank on that loan. I never see the loan repayment since it auto deducts from my USAA account with my paycheck.

    For me, this is not a debt burden. I pay it off without problem, I have a nice liquid savings to use and invest, it is actually "good debt" on my credit report, and a nice rainy day fund now. I also have some good indirect benefits. I live on $550 less a month (and actually another ~$200 or so less since I took the gov't forward pay at 0% interest). Since I am used to this level of income, a good $700 below my actual salary, I am living VERY comfortably and when that money is no longer deducted, I will have quite a higher "disposable" salary that I can further invest and skim some for other niceties (each out a couple times more often?).

    While the 2009 grad I talked about defaulted, that should not be a reason to reject the loan. It's a very low probability chance, and if you are a good cadet (not kicked out after taking the loan) and a good officer (don't get involuntarily discharged), this will not harm you AT ALL.

    USAA named it the "career starter loan" for a reason. It's a low-burden loan that helps teach some financial responsibility. I'd say ~90% of cadets that took it were responsible and have benefited quite well from it. Those that were fools, well they now have a ~$550 debt obligation per month (from a base salary+BAS of about $3000 monthly plus another $500-2000 depending on their BAH location) to take from. Unless they have other serious loan obligations, that's hardly a money killer. Even a mistake is a low-risk mistake so the lesson, while learned, isn't severely costly.

    So, in conclusion, if you cannot have fiscal discipline, don't take it. Otherwise, it is a good decision and a great way to learn fiscal responsibility, learn about loans and their impacts, a potential way to improve your credit rating, and, if treated right, can have some great returns.

    My recommendation: take the loan.
     
  16. raimius

    raimius USAFA Alumnus

    Joined:
    Jun 9, 2006
    Messages:
    2,047
    Likes Received:
    120
    I'm about 50/50. I used part of the loan on things I wanted, and invested part of it. The total cost of the loan interest is about $1800 for the class of 2010 (1.5%). I have already made more than that with my investments. I also never have to worry about month to month finances, as I have a comfortable reserve on hand.

    To make it a sound financial decision, you need to invest a solid majority into decent investments immediately. If you spend a big chunk of it, it's not such a wise choice. As a single O-1, with BAH, I have no trouble paying the loan, a previous car payment, rent, and investing little over 10% of my pay.
     
    Last edited: Feb 18, 2011
  17. marciemi

    marciemi USMA Alumnus

    Joined:
    Feb 5, 2009
    Messages:
    1,481
    Likes Received:
    0
    Appreciate the input from some of the 2010 grads! I was beginning to wonder if our Financial Advisor was lying to us! :wink: We'd mentioned this loan and his advice was that if you could borrow money under a certain percent (and I can't recall what he said, but know 0.5% certainly was under it), that you certainly should and there were lots of ways to invest it wisely. We were definitely having our son take the loan in 2 years and putting it in various investments (ROTH IRA, some mutual funds, etc) before I read this thread and was thinking then maybe it wasn't in our son's best interest and our FA was just trying to get a commission or something. But it sounds like most agree that if can can be invested wisely, and paid off regularly, that that there's no reason not to take it? :confused:
     
  18. Gasdoc

    Gasdoc Member

    Joined:
    Jan 3, 2009
    Messages:
    124
    Likes Received:
    12
    Ours took the loan - funded a ROTH IRA and a portfolio of a several stocks and mutual funds, keeping the rest as a rainy day fund. He hasn't spent a penny of it.
     
  19. Bundy

    Bundy Member

    Joined:
    Jul 16, 2009
    Messages:
    66
    Likes Received:
    0
    At the time of the offer do you have to declare the total amount you wish to borrow and that's it or do you have additional opportunities to borrow again if you so choose? If you only get once chance, then I assume there is a window of time to take advantage of the offer, but when does that window "open"? And I assume you don't have to borrow the full $35K (?).
     
  20. aggie83

    aggie83 Member

    Joined:
    Oct 8, 2008
    Messages:
    369
    Likes Received:
    4
    It's that time again - C2Cs got emailed the information for the USAA loan today - $36,000 @ .75% interest. Oh what do to, especially with the the volatility of the stock market recently. Reread this forum for things for our cadet to consider both pros and cons. Any recent experiences from the now firsties out there?
     

Share This Page