2/C Loan Question

momofmod

Member
There have been many different opinions offered regarding "the loan." My question for all you experienced folks - are there financial advisers available to the mids at USNA? A company called First Command has been recommended to me but my son was concerned there would be fees involved. He's very risk averse and not looking to doing anything more than a safe investment for the future. No vacations or a fancy car in is plan. I'm just a sounding board for him and would like to at least have a decent sense of what's what. Thanks for your opinions.
 

jl123

Member
A financial advisor will always have a fee, whether it is charged directly or built into the products they sell. Fees are not always obvious to someone who does not know where to look and the difference in fees can be substantial between different products and advisors. Not familiar with First Command, but a financial advisor can be helpful for someone with little investment experience.

My opinion is to only deal with an advisor that is a CFP (Certified Financial Planner). I also prefer an additional certification of CFA (Chartered Financial Analyst), but that may be harder to find for someone just starting out.

The 2/c loan is a no brainer for someone looking to invest safely, at least at current interest rates. The terms this year were $36,000 at 0.75% (USMA, I assume USNA is the same). Rates on Treasury Bills and money market funds are above 2%. Important to plan for those loan payments that will start a few months after graduation and to have sufficient short term cash available for setting up first household and emergencies.
 

Capt MJ

10-Year Member
The mids get educated on basic financial principles, debt and credit management, budgeting, investing for retirement. Military folks cannot recommend specific firms, products, services or courses of action when they are in a position of authority over juniors in rank.

The firm you mentioned does a free financial plan for active duty. Their licensed advisors earn compensation through commissions from the mutual fund or other products if the client invests in the recommended product. No fees to them from midshipman pocket. Though the firm hit a bumpy spot in the road over 15 years ago, they recovered, reorganized and operate in a comparable way to other FINRA-compliant financial planning firms doing business with known financial product providers. The CEO is a USNA grad, and 70% of the advisors are veterans. They are known for F2F meetings and offices near almost all military bases.

The two firms that offer the career loans may offer some basic counseling. Similar to the firm you mentioned, they have all been in the business of serving the military for decades.

There are at least a dozen threads on the career loan in all forums. Recommend browsing.

Your DS should do his due diligence, hear what these firms are offering, make no commitments, think it through, seek neutral counsel. You’ll see a wide range of opinions on the loan here on SAF, understandably reflecting a wide range of personal philosophies.

He should also understand every term of the loan and read all fine print, especially what happens to the interest rate if he defaults on the terms and for whatever reason, does not commission.
 

Mr2020

U.S. Merchant Marine Academy '19
commissions from the mutual fund or other products if the client invests in the recommended product. No fees to them from midshipman pocket.
The mutual fund pays commissions to the adviser by charging fees to the midshipman. The midshipman is indirectly paying those fees and paying for the fund management.

Investing the loan in the stock market even through mutual funds is a bad idea I think. I did it, and have seen some real swings in the past few years. Every time the market swings down I remember that I still owe $36,000 plus interest no matter how the market performs. Even though at this moment the investment is in the black.
 

momofmod

Member
The mids get educated on basic financial principles, debt and credit management, budgeting, investing for retirement. Military folks cannot recommend specific firms, products, services or courses of action when they are in a position of authority over juniors in rank.

The firm you mentioned does a free financial plan for active duty. Their licensed advisors earn compensation through commissions from the mutual fund or other products if the client invests in the recommended product. No fees to them from midshipman pocket. Though the firm hit a bumpy spot in the road over 15 years ago, they recovered, reorganized and operate in a comparable way to other FINRA-compliant financial planning firms doing business with known financial product providers. The CEO is a USNA grad, and 70% of the advisors are veterans. They are known for F2F meetings and offices near almost all military bases.

The two firms that offer the career loans may offer some basic counseling. Similar to the firm you mentioned, they have all been in the business of serving the military for decades.

There are at least a dozen threads on the career loan in all forums. Recommend browsing.

Your DS should do his due diligence, hear what these firms are offering, make no commitments, think it through, seek neutral counsel. You’ll see a wide range of opinions on the loan here on SAF, understandably reflecting a wide range of personal philosophies.

He should also understand every term of the loan and read all fine print, especially what happens to the interest rate if he defaults on the terms and for whatever reason, does not commission.
I searched for a thread using a few different phrases and didn’t come up with much. I trust my son to have done his share of research I just wanted to be better informed
 

Korab

Member
commissions from the mutual fund or other products if the client invests in the recommended product. No fees to them from midshipman pocket.
The mutual fund pays commissions to the adviser by charging fees to the midshipman. The midshipman is indirectly paying those fees and paying for the fund management.

Investing the loan in the stock market even through mutual funds is a bad idea I think. I did it, and have seen some real swings in the past few years. Every time the market swings down I remember that I still owe $36,000 plus interest no matter how the market performs. Even though at this moment the investment is in the black.
This is terrible advise. Please talk to a certified financial planner. Putting your money in an index fund and letting it sit for 40 years is the best thing you could possibly do with your money. Anyone who is 20 years old and worries about their money going up and down on a daily basis has the wrong approach. Set it and forget it. Seriously - don't look at it for 20 years.
 

jl123

Member
A good financial advisor is valuable and can help someone understand the risks/rewards of investing. The scenario of the 2/c loan is pretty simple for a seasoned investor, but can be daunting for someone with no experience. How that money is invested varies according to financial situation; for one person a 100% investment in a stock fund is wise, for another person that same investment is a bad choice.

Think of Mr2020's situation if he put everything into the stock market in 2007 - he'd be doing really well right now, but would have been in deep trouble if he needed the money in 2009.

The $36k 2/c loan should not be viewed as a traditional investment. It is money that is normally spent to transition a cadet/midshipman to life as a junior officer: car, apartment down payment, etc. Some who can handle transition expenses without the loan may choose to invest the money, but must clearly understand the terms of the loan (as Cpt. MJ described). They may need to pay that loan off immediately or be subject to much higher interest rates, and better have the cash available to do so. Or they may need money to meet unexpected expenses.

With respect to expenses: The average fee for an S&P Index fund is 0.59%. USAA charges 0.25% and Schwab charges 0.02% for their S&P Index funds. These are passive investments intended to match the market. Fees are much higher for actively managed funds intended to beat the market. The higher the fee, the more likely a portion is used to pay commissions to financial advisors.
 

OldRetSWO

USNA 78/parent 11/BGO for >25yrs
5-Year Member
There have been many different opinions offered regarding "the loan." My question for all you experienced folks - are there financial advisers available to the mids at USNA? A company called First Command has been recommended to me but my son was concerned there would be fees involved. He's very risk averse and not looking to doing anything more than a safe investment for the future. No vacations or a fancy car in is plan. I'm just a sounding board for him and would like to at least have a decent sense of what's what. Thanks for your opinions.
First Command used to be called USPA&IRA back when I was a junior officer and they were then (and now) pretty well known within the officer community. I invested with them early in my career and at the time they were pushing a mutual fund "Fidelity Destiny" and I put some money into it. Over time, I learned more about investing and saw that it was not a good performer and moved my money (and business) elsewhere. Over time, I learned about some great investing tools like the "Morningstar" ratings of mutual funds and "Value Line" reviews of stocks and of the two, Morningstar was far more helpful as I managed my and some family members accounts. Please do not take away that I'm disparaging FirstCommand as I have friends and classmates who work there and I consider them honest and trying their best for their clients.
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As a neophyte investor and military officer who is looking for a safe investment for the future, he really needs to look at the TSP (Thrift Savings Plan) which is an extremely low cost way for him to begin to build his nest egg for the future. This is a retirement account so not for money he'll use in the near term but it is a great way for military members to start on a 401k equivalent.
 

Capt MJ

10-Year Member
TSP is available after commissioning, and is a great way to dedicate a part of military/Fed pay for the long haul. It’s also portable at separation and can be rolled into an employer 401k. There is a choice of funds, including targeted retirement funds that get adjusted over time.

https://www.tsp.gov/index.html

I started an IRA at age 20, fully funded every year. My investment profile has shifted from aggressive growth mutual funds (when I had decades to recover from market swings) through the spectrum of lesser risk, and when I am an Elder Elder, I will be all about capital preservation.

Whenever the market dipped, I told myself I only lost money if I was cashing out shares of funds right then, that with monthly investment, I was “buying at the sale table,” when shares had dropped in value. Those shares eventually rose in value, up and down, an endless cycle, but with enough diversification and commitment to living within a budget, controlling debt and managing credit, you can usually build wealth.
 

Jcleppe

5-Year Member
The only downside I see with taking the loan and placing the entire amount into stocks or mutual funds is that your basis of return is tied to the market value at the time you invested the entire amount. I have leaned more toward the Dollar Cost Averaging approach.

Now if one were to take the loan and park the entire thing into a Money Market account that will currently have a return of about 2%, they are still ahead of the loan interest rate. Once the money is in the Money Market account they could then begin to transfer a certain amount each month or as they follow the market trends using the Dollar Cost Averaging method. If someone were to take out the loan today and invest the entire amount into the market through mutual funds, they would be doing so at what is currently a record high, spreading out the investments into these funds would take advantage of buying in when the market has a downturn.

One thing I would highly recommend would be to max out a ROTH IRA contribution every year then put the remaining investment funds into either the TSP or other Mutual Funds, but do the ROTH first.

I realize there are many opinions on which way to go and this is just one of many. Doing your research and being educated on investing is always a good idea.

Whenever the market dipped, I told myself I only lost money if I was cashing out shares of funds right then, that with monthly investment, I was “buying at the sale table,” when shares had dropped in value. Those shares eventually rose in value, up and down, an endless cycle, but with enough diversification and commitment to living within a budget, controlling debt and managing credit, you can usually build wealth.
This says it all in a nutshell.
 

jl123

Member
A note on financial advisors. There are regulations that limit an adviser from putting a client into an inappropriate investment, but if the choice is between two appropriate investments the adviser can recommend the one that maximizes the adviser's commission - they are not required to act in the best interest of the investor (some exceptions, such as retirement accounts).

One reason I prefer to work with a CFP/CFA is that hose organizations require members to act in the best interest of the investor or risk losing their certification. Nothing against the many excellent advisers without those certifications; I just prefer as many checks and balances as possible.
 
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