Cadet Loan Questions / Info

aggie83 said:
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?
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Well, from the perspective one year out of the academy and 2 years after the loan....still VERY happy with my choice. I'd still take it.

If you don't have faith in stocks, you can put that loan into a CD or bond for higher interest than it costs. Why not do it?
 
It's very interesting that this should come up, since I just talked to our son about the loan the other night.

He is now at UPT at Laughlin AFB, and is still living in the base hotel due to a shortage of housing for all of the incoming Lts. He (and many others) had planned on living in the Unaccompanied Officers Quarters, which are furnished, so he did not worry about furniture. Well, as they are finding out, the wait is going to be a while because of the overcrowding and the incoming ROTC trainees are moved ahead of the Academy grads on the housing list.

So, he and 3 friends were offered a 4 BR 2BA house in the privatized base housing and they decided to take it. They will be moving in a couple of weeks. The problem is that none of them had any furniture, so they made a trip to the local furniture store and each bought a bedroom set and other furniture for the house. Since they all had cash (from the cadet loan) and were making a large purchase, the store gave a 20% discount. Our son told us that the discount on his part of the furniture was greater than the entire interest that he paid on the $35,000 cadet loan.

He also said that since each of them are getting their full BAH, but are splitting the cost of the housing, the extra BAH money makes the payment on the cadet loan. Although, he said that the payment would not be any problem regardless of getting the BAH.

His advice on it is still that the cadet loan is a good thing and has paid back many dividends. Even with the shrinkage of the market lately and his furniture purchase he still has much more in the bank than the original loan amount, even after fully funding his IRA for 3 years.

Stealth_81
 
Our kid is a C3C and have enjoyed reading the posts on this forum. As a Financial Advisor for the last 20 plus years I thought I would add my own 2 cents on this. I absolutely would encourage everyone to begin to invest as soon as possible, but I would venture a guess that the positive tone of some of these posts would be very different if the money was invested in the markets in 2006 rather then before a tremendous rally that ocurred after the financial crisis. Debt free if possible is a worthy goal. Obviously opportunities arise that justify debt, but wouldn't it be great to go through life debt free. Maybe impossible, but the freedom derived is special. Anyway's, the advise on dollar cost averaging to lessen market volatility and buy more shares at a lower cost is sound advice.
 
It's a great deal!

My son has just started his first-class year at United States Coast Guard Academy. They receive a $35,000 loan at 1/2% interest sometime after Easter of their second-class year. Most of the cadets use some or all of this money to purchase a car. The loan repayment does not begin until three months after graduation and is paid back over a five-year period.

Monthly payments beginning three months after graduation are approximately $591 per month for five years. The total interest over five years comes to approximately $447 or about $90 per year.

At the Coast Guard Academy the students meet with financial advisors. They usually recommend that $15,000 be allocated for a car and $20,000 be invested. The advises helped my son set up a portfolio including IRA and mutual fund investments. He is also set up automatic deductions to increases investments on a monthly basis.

He took $15,000 of the loan and a flight that toward a new car. He had also saved up almost $8000 from his spend money at the Academy and had additional money he had saved while working summers during high school. As a result he was able to buy a brand-new car for $24,000, paid $5500 for cosmetic braces while at the Academy not covered by the government and still has about $3000 left in his account. While it is not required, most seniors or first-class cadets have a car. Some cadets receive their parents old car, others buy late-model premium cars like BMWs or four-wheel-drive pickups while other cadets by new cars which are practical and reasonably priced. My son wanted a sports car but after considering his options elected to get a four-wheel-drive four-door compact SUV/sports car to combine practicality and economy with a semi-sports car appearance.

I think that the academies are doing a good job in helping their cadets obtain their first car so that they will be ready for their first billet prior to graduation. While doing this they are also counseling the cadets to set up investment, savings and retirement programs even prior to graduation.
 
Do they pay interest from the time they take the loan out even though they don't start making payments until 3 months after graduation? I suspect so, but I really can tell from some of the postings.
 
MB 13 said:
Our kid is a C3C and have enjoyed reading the posts on this forum. As a Financial Advisor for the last 20 plus years I thought I would add my own 2 cents on this. I absolutely would encourage everyone to begin to invest as soon as possible, but I would venture a guess that the positive tone of some of these posts would be very different if the money was invested in the markets in 2006 rather then before a tremendous rally that ocurred after the financial crisis. Debt free if possible is a worthy goal. Obviously opportunities arise that justify debt, but wouldn't it be great to go through life debt free. Maybe impossible, but the freedom derived is special. Anyway's, the advise on dollar cost averaging to lessen market volatility and buy more shares at a lower cost is sound advice.
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Debt free is nice, but also we don't have to worry about having a secure job during the loan repayment period.

I knew plenty in the class of 2009 who invested at the peak of the market and it crashed. They said it sucked, but still would have taken the loan. The loan itself is a great deal, it's the person's choice how they squander or profit from it.
 
aggie83 said:
Do they pay interest from the time they take the loan out even though they don't start making payments until 3 months after graduation? I suspect so, but I really can tell from some of the postings.
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It accrues interest immediately. But that is not a lot of interest. lol
 
When is the window of time where you can take it out? Do most start making payments after they graduate?
 
Undoubtedly everyone is entitled to choose what financial path to follow. Almost everyone finances the purchase of a car or a home. My point on my prior post was based upon years and years of seeing clients make assumptions that the ROR on their investments would exceed the cost of their borrowed money. This is not always the case and can have dire consequences. With that said, it is very difficult to argue the offered interest rate on these loans is punitive when compared to alternative loan sources. If you need a loan, this probably is a good way to go. To take a total left turn-you'll never get rich without taking risk-just make sure you know the down side....
 
There are many ways to invest. With a .5-.75% loan, it's definitely smart money to use. Now; buying a $25-$30K car in my opinion is stupid. Then again; I was young once and also was stupid once. But investing can be done safely.

If you invested in the straight up stock market, that was silly. However; if you put $5,000 immediately into a ROTH IRA, that would be smart. Doesn't matter what the market does today; you have 40 years of time on your side for it to come back and redirect later.

My suggestion if you're going to take the loan:
1. Take $5,000 immediately off the top and invest in a ROTH IRA.
2. Take $5,000 and put it into a ladder CD with automatic rollover. Even with 1% interest.
3. 7 Months later, you'll hit the first of the year; add another $5,000 to your ROTH IRA.
4. Put $10,000 into a savings account so the money will be there when you graduate and have to start a new life. You don't have to try and have the same standard of living as your parents. They worked 30+ years to get where they are. $10,000 is more than enough to set up an apartment. If you don't think you can buy a bedroom, living room, dinette, and kitchen, (Including tv and entertainment); then you ARE trying to live like your parents, at their standard of living. You don't need the $3500 Big Screen or the $5,000 living room set.
5. This leaves you $10,000. What you do with this, will depend on what you currently have saved and possessions. If you already have a decent dependable car, there's absolutely no reason to buy another. If you already have $10,000+ saved in the bank after 4 years of school, you might use the $10,000 leftover from the loan towards a vacation or towards your emergency money account. That's the account you don't touch unless the engine blows on the car; emergency air fare for an emergency; etc... This account needs to be replenished and always maintained. Again; this depends on how much you already have saved, do you have a decent car, etc...

The loan can be smart money. It can also be stupid money. It all depends on what you do with it.
 
Good advice! Making plans today for a sound financial future is always a good idea.
 
My DS took the loan - $35,000 at 0.5% last year - and has invested $5000 in an IRA in 2010 and 2011 (total $10K); bought a $7500 CD with a solid interest rate that will mature the same month he has to begin make payments, (Sept 2012 for the class of 2012); has the $10,000 Emergency Fund set aside for when he graduates and has to move, needs furniture etc, and has used some of the rest for a spring break cruise and other trips and and adventures. He was lucky in that he already had a car, so that was not an issue, but my observation is that having the money has taught him financial responsiblility and planning, as well as allowing him to do things that otherwise might not have been possible, and which provided the much needed relief and relaxation from the grind of USAFA.
 
cadetmom100 said:
My DS took the loan - $35,000 at 0.5% last year - and has invested $5000 in an IRA in 2010 and 2011 (total $10K); bought a $7500 CD with a solid interest rate that will mature the same month he has to begin make payments, (Sept 2012 for the class of 2012); has the $10,000 Emergency Fund set aside for when he graduates and has to move, needs furniture etc, and has used some of the rest for a spring break cruise and other trips and and adventures. He was lucky in that he already had a car, so that was not an issue, but my observation is that having the money has taught him financial responsiblility and planning, as well as allowing him to do things that otherwise might not have been possible, and which provided the much needed relief and relaxation from the grind of USAFA.
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This is what I did. Since we got ours in Feb, I maxed both years (2009 and 2010 at that time).

I saw classmates squander their money. Some people can't do it. It comes down to knowing yourself. If you can't handle it, don't take it. Most do though.
 
That is what Hornet and Mike are saying. The ROTH IRA is a retirement fund.

Mike I laughed at one of your comments.
Christcorp said:
Now; buying a $25-$30K car in my opinion is stupid. Then again; I was young once and also was stupid once.
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I wish I could say only once. We did it once with the car, but honestly we did other stupid things too.

Biggest, bestest gas grill that lasted as long as the bottom line grill.
Biggest, bestest electronics, that before the box made it to landfill was no longer the biggest, bestest.

I see it as 2 ways.

~~~ The person who gorges because there is so much too eat will regret it later on.

~~~ The person who eats slowly will enjoy everything offered on the table.

Rule of thumb for financial success is to pay yourself 1st. That doesn't mean buying a car or frivolities, it means investing @ 1/4 of your pay. Put it in something that you can access, but not something that is easy to access. It will make you think 2x before you purchase anything.

OBTW, anyone who buys a car with that loan IMPO is foolish, since, many of the car companies are still giving very low int. rates.

Additionally, if you read the book Rich Dad, Poor Dad, they will tell you the fiscally smart people, buy nicer cars than the not so fiscally smart for the exact same price. The difference is they buy gently used.
 
The market just gave up all the gains for the day-what's new. I'm still having a hard time getting my head around investing borrowed money, but at least there seems to be a lot of work and thought put into the process. I did want to mention however, assuming 8% rates of return is extremely optimistic based upon the last decade. S&P Index 1520 -8/2000-1540-10/07-1193 currently. Obviously there are different entry points which would show different results. One of the main problems we are experiencing with our economy is the over inflated projections in regard to State Pension plans, coupled with no fiscal discipline -see CALPERS. I absolutely love the fact that these young men and women are beginning to invest, I just wish it was with non-borrowed money-IMHO.
 
These are, for the most part, 21-22 year old kids we are talking about, and many of them don't see the "investing for the future" picture at this stage of their life, which is not uncommon for anyone at that age.

Buying their first car (not necessarily a brand new Corvette or other new model sports sedan for the entire amount) is not the best choice, but using the loan to buy a used car is not necessarily a bad thing either.

In fact, I would wager that the majority of mids/cadets who take the money do exactly that - purchase a used car. They, after all, are college seniors, and still look at "having fun" as a desirable goal, even if that "fun" is not even near what their non-military friends are having. And having access to reliable transportation, to get them away on the weekends, to get them home if within driving distance, to have some feeling of a way "to get away" when they need to, even if it's driving their girlfriend to the local movie and dinner - is not a bad thing, and no one should really scold any cadet/mid who chooses to spend a some of that cheap cash now.
 
For the person who is good at saving, taking the loan, even for investments, is not really necessary. You could take $400 a month from pay, and put almost $5,000 per year into a ROTH IRA. That's less per month than the loan amount on the $35,000 you are borrowing. And you can only put in $5,000 per month if under 50 years old....... so, what is the advantage of investing borrowed money instead of the money you were going to use to pay back the loan. EXCELLENT QUESTION.

For investment purposes, there is only 1 advantage to investing borrowed money like the cadet loan. TIME!!! You get about 2 years of investment, without having to pay it back or save up for it. Now, will that 2 extra years of investing make a difference? This is where most people don't realize how important investing early really is:

SCENARIO: If you put $5,000 each year into your ROTH IRA, and it averaged 6% interest over a 40 year period, at age 60, you'd have $833,936.75.

If you used your pay instead, and waited 2 years until you graduate, and invest the SAME $5,000 per year into the ROTH IRA, and it averaged 6% interest over a 38 year period (Started 2 years later). At age 60, you'd have $730,408,53.

So, by using money you borrowed, at basically interest free, you gain $103,000 by investing 2 years earlier. Now; at an even more conservative 4% return averaged over 38-40 years, the difference is about $50,000.

So that is the reason for investing borrowed money. But ONLY if you can make a better interest rate than you are paying. And you will. But don't look at today's interest rates. You have to look at the average for 40 years. Remember; it might seem to suck now for investing, however when the market is down, stock shares are down, which means you are BUYING MORE SHARES for the same amount of money. Obviously, the greatest scenario is for you to buy shares every month for 39 years, and the market ALWAYS SUCKS. Then, in the last year, it goes way up and you sell off everything and put it into an annuity. But that's not reality. Reality is that it will go up and down a lot of times in 40 years. IT HAS TO. If not, we'd have hyper-inflation.

Anyway; that's why you invest borrowed money. The only other reason to take the loan, is so you have enough money to start a new life with furniture, kitchen, car, etc... This is what the loan was intended for.
 
This will definitely be my last post-Hard to argue with CC's logic here. My only point is when you borrow money you do have to pay it back and the markets may not be friendly at the start up point. Dollar cost averaging does lower market volatility and you do purchase more shares at low points in the markets. I do this for a living and therefore may bring a different perspective. I for one am much more worried about the economic environment our country is facing and our overall direction. BTW I would love to see long term investing come back into play and it would be very beneficial if we could limit the "QUANTS" and high frequency trading. This type of trading repesents the vast majority of volume on the Indexes lately and has nothing to do with investing as it should be. I hope everybody has a safe trip to PW.
 
Don't get me wrong MB. I'm not making a blanket recommendation that everyone should take the loan. My son took the loan last year, (He's a C1C this year), but I didn't think he needed it. He has plenty of money saved up to get him through moving into his first apartment. And he has a good car. But he is very good with money; (I taught my kids the value of a dollar every day). USAA has CD's at the 2.55% range. If you took the entire $35,000 and put it in a CD at that rate, in 7 years, (2 at the academy and 5 to pay back the loan), the CD would be worth $41,831.88. That $6,000+ is a lot more than the interest on the loan. And it's basically a FORCED savings account. You HAVE to pay back the loan. But you aren't forced to save. So basically, you are forced to save $590 a month. Which isn't hard for a 2Lt. So, the day you get out of the military, if you choose to at 5 years, you have over $40,000 to work with. And the accumulated interest each year on the CD is low enough to not really affect your taxes.

This is the very least I would recommend for the person who takes the loan, but they have no real need for it. The money isn't locked away long term. You can get it if you really need it. But you lock it up for 7 years for a half way decent interest rate.

I have to admit that I am not the most comfortable with the "Long Term" retirement investment situation. But I have seen it go up and down over the years. I am trying to retire, LITERALLY, when I reach 59 1/2 years old. I'm hoping I'll be financially set by then. Then, if there is still Social Security at age 62, that will be extra. But I am a little nervous. So if young cadets are a little nervous about funding an IRA, they should at least through it at a USAA 7 year CD @ 2.55-2.60%. It's guaranteed, and it's a FORCED Savings Account. Instead of them living pay check to pay check when they first get out. Then, if they are in or out of the military after 5 years, they have a decent nest egg to use for something significant or for future savings.
 
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