2/C Career Loan
I remember reading somewhere or being told that SA seniors are given $30,000 on graduation, that is deducted automatically from their paychecks for the 5 year commitment. How exactly does this work?
Just to be clear, these career starter/kick-off loans are offered by external financial institutions, not by the U.S. government, and are completely voluntary. The practice grew out of inexpensive car loans being offered to juniors some years back, with some extra cash being thrown into the loan at the same rate as the auto loan, so the midshipman/cadet got a great car loan on favorable terms plus some cash.
That loan morphed into the signature loan that it is now, with the idea being the midshipman/cadet pays off higher-rate debt, gets a headstart on IRA and other investments and has some cash available to pay for uniforms and other household start-up items after graduation, as well as contribute to the purchase of a car or other large purchase. The amount of the loan is keyed to Ensign or 2LT pay, with the monthly repayment amount a reasonable debt load over a five-year repayment period commencing a few months after graduation.
Typically, the loans are available to juniors, with payback by EFT from their account at the lending institution, where Direct Deposit of their military pay is required. So, the midshipman/cadet has full use of the funds for more than a year without having to pay back. For the loans with which I am familiar, the full amount of the loan does not have to be taken. A more conservative mid or cadet might just take $25k, with commensurately lower payments. The current payback period is running 5 years for Academy grads, with no penalty for early payback.
Once the midshipman or cadet takes the loan, all normal loan default rules apply. If the midshipman or cadet leaves the Academy or the service, the loan must still be repaid. Midshipmen and cadets sign a detailed loan contract with all default penalties spelled out.
Some financial institutions also make a version of this loan available to ROTC and other commissioning program candidates.
Yes, midshipmen and cadets will occasionally do totally stupid stuff with the money and blow it all on consumer goods or fun. The vast majority do mostly the common sense things, pay off a higher-rate auto loan, get rid of credit card debt, get a chunk into long-term investments, put aside an amount for graduation expenses. When I was on USNA staff, I had a midshipman for counseling who had run up $35k in consumer debt as well as taken the $22,500 (at the time) career loan. His problem came to light 1/C year, when he could not afford the up-front payment the Marine Corps required to pay for his set of uniforms. He thought going to a club that only had a 2-drink minimum rather than a 3-drink minimum was the way to budget... He was the exception, rather than the rule.
The recidivism rate is very low for this group, as you would expect, so it's a great way for the financial institutions who traditionally do a lot of business with the officer community to lay the groundwork for a life-long relationship. Most midshipmen and cadets consult their parents and family advisers on doing the right thing with the loan. Some of the financial institutions offer free financial advice geared specifically to this group, from salaried (no commission) CFAs who help educate the mids and cadets on various options.
