Career Starter Loan

Discussion in 'Air Force Academy - USAFA' started by MomofFutureLeader, Sep 3, 2014.

  1. MomofFutureLeader

    MomofFutureLeader Member

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    So, my 2016 cadet just received e-mail from USAA regarding Career Starter loan. Max of $36k at .75% with five year payback beginning Sept 2016. Planning to pay off his 3.9% (or thereabouts) car loan to start. Roth IRA already mostly funded for the year so probably looking at mutual funds for most of the rest, spread across several different funds with varying risk to diversify.
     
  2. raimius

    raimius USAFA Alumnus

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    Sounds like a good plan.

    It's a pretty reasonable loan to take, considering inflation is usually more than the interest rate...so, when adjusted for inflation, you are paying less than you borrowed. That makes it incredibly easy to see a positive return on investment. My loan rate was double that, but I had made back all the interest I would pay within 1 year, and I only invested part of the loan.

    EDIT: That assumes he graduates and stays in the military until the loan is repaid. The fine print usually includes some triggers where the interest goes ridiculously high if you wind up in a different situation.
     
  3. fencersmother

    fencersmother Founding Member

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    My kids took the loan too, but the principal wasn't as large and the interest rate was a little less. Know some kids who did not take it, and some who took it and invested it.

    Far cheaper than most commercial loans out there for young people, and not all the credit hassles.

    *I* would take it, if I were offered it.
     
  4. Pima

    Pima Parent

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    That is the key Raimius. If for whatever reason he separates that rate jumps to over 20%.

    Our DS did not take the full loan,he took only 1Ok. He purchased his car on a 0% int loan. He placed 5k in an IRA and 5k in a money market mutual for him to set up his first place and Gforbid issues. Basically, but bc he got such a low car rate he did not take the full amount USAA offered. His thought was he would not carry any more debt than USAA offered at the low rate. His fear was if he washed out of UPT he didn't want to carry that credit burden.

    He is an O2 now (class of 12 AFROTC). He has paid off his car and the 10k he borrowed early without ever feeling strapped. He is glad that he didn't take the entire amount because he will be pcsing to his 1st OP base as pilot with a 4 year assignment, and since it is paid off it will not be a factor in the amount of home he can qualify for regarding a mortgage.

    Plus, unless things have changed when you PCS to your 1st OP base you can get 1 month Base pay at 0% repaid in 12 months. That means for him he will be able to drop another chunk into investments without truly feeling the pain financially.

    the career starter loan is great, but if they don't think long term they can over extend very quickly. Let's be honest this repayment will be @750 a month. Credit wise that debt alone will be close to 20-25% of their net pay. If he wants to buy a home even via VA there are limits regarding debt ratio. If he has multiple credit cards he can quickly pass the ratio.
    ~ Another reason DS did not take the full amount was because he set up a monthly direct investment program, AF and USAA. He would have been strapped in his case.

    OBTW if he has not opened an AMEX yet with USAA have him do it now. He can use it everyday and collect points to use for airline tickets. We always used our AMEX like a debit. Even paid our car off using AMEX. So if he is going to use the loan to pay off the car, have him look into see if the car loan provider will allow AMEX as a payment. If so, between the points awarded for opening an AMEX AND paying off the car he should be at a free airline ticket.

    You will be amazed how you can squeak a nickel out of every penny!
     
    Last edited: Sep 3, 2014
  5. Spacer

    Spacer New Member

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    Just a couple of corrections and thoughts. The monthly payment, even if interest is accrued beginning now through graduation, is less than $630/month. I would also look at that payment as an automatic investment but you get your principal up front. So much is dependent on what you do with the money. If invested and you want to buy a house you could use the money to increase your down payment which would lower your mortgage which undoubtedly is at a higher interest rate and if non-VA might get you out of PMI (yields overall lower monthly payments).
     
  6. MomofFutureLeader

    MomofFutureLeader Member

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    Interest does accrue immediately. Acceleration rate is 18%. No guarantees in life but he is still very enthused about USAFA, doing very well, and shows no inidication that he would even consider not completing his time there. Pymts are $620/month if he takes the full amount. He bought a nice used car earlier this year for approx $10k that we just drove out to him at Parent's week-end. That debt will be retired. He came to USAFA with quite a few scholarship funds so has been fully funding a Roth IRA the past two years from his current cash flow and some funds that he had set aside for school. So, what is left of the loan after paying off the car loan would be set aside and the hope is that it will grow to more than cover future payments and allow for a decent return as well.
     
  7. Christcorp

    Christcorp Member

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    Totally agree; that if used properly, the starter loan can be great. I have seen some however that didn't save "ANYTHING" during their 4 years at the academy. By the end of your 2nd year, you should have no problem saving a few thousand a year. However, some did take the $35,000 loan to buy things. Car, furniture, travel, etc... Basically; they didn't have any of it to invest with.

    If the loan is used mainly to become debt free and to invest, then it's a great thing to do. If it's mainly because when you graduate you are broke........ then something tells me that you're going to have future financial problems. Not everyone who goes to college/academy/university is financially mature.
     
  8. EDelahanty

    EDelahanty Member

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    Pima's 10,000th post. Thanks for all the wisdom and experience.

    At this post we're supposed to stop the game and give her the ball for her trophy case.

     

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