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Old 18th February 2011
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Default Cadet Loan Questions / Info

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?
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Old 18th February 2011
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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?
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Old 18th February 2011
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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.
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Old 18th February 2011
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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.
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Old 18th February 2011
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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?
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Old 18th February 2011
HNeedle HNeedle is offline
 
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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.
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Old 18th February 2011
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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.
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  #8  
Old 18th February 2011
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The Borrower is Slave to the Lender.
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Old 18th February 2011
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Quote:
Originally Posted by Packer View Post
The Borrower is Slave to the Lender.
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.
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  #10  
Old 18th February 2011
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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.
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