Cow Loan

[America's Finest]

Amount and terms are not quite as good as the loan availabe to West Point Grads. Definatly not worth taking the loan just to invest unless you pick your investments wisely and have a little luck considering the market as it is today. Some new car loans have interest rates that equal or beat the 3 %, using the loan for the purchase of a used vehicle could still be a good option. of course I'll disown him if he spends 25k on a used vehicle.

Thanks for the info JAM

Yeah, most of my friends have gotten car loans at 1.5-2% so it wouldn't be worth it for a car but for an unsecured loan, 3% is still great. I do disagree with your opinion on investmenting it, however, since I believe a down market is the perfect time to buy. Sure, you will take a hit until it bottoms out but then it'll rise again. If you're planning on investing for a long enough time then it is definately wise to take advantage of the bottom of the market curve.

 

[Jcleppe]

Yeah, most of my friends have gotten car loans at 1.5-2% so it wouldn't be worth it for a car but for an unsecured loan, 3% is still great. I do disagree with your opinion on investmenting it, however, since I believe a down market is the perfect time to buy. Sure, you will take a hit until it bottoms out but then it'll rise again. If you're planning on investing for a long enough time then it is definately wise to take advantage of the bottom of the market curve.

The problem is knowing when the market bottoms out. If a cadet took the loan today and invested the money in stocks or mutual funds they would be entering the market at a high mark. Betting the market will go down again low enough to take advantage of a down market is risky at best, and that's for those with experience in investing. Paying 3% on money you plan to invest is very risky when many experienced investors have lost money.

While the loan may not match interest rates of new car dealerships, the loan could work well for a used car, normal interest rates run higher for those loans.

 

[Dixieland]

No not a WP grad or Dad. I have a son in NROTC as a College Programmer. He also began (never finished) an application ti USNA. I've hung out on these forums for quite a while and try to pass along what little knowledge or informed opinion I have.

Ah, okay. Interesting.

 

[PotentialParent]

Anyone considering the loan should read this thread

I found a good dialogue discussing the pros and cons of the loan in the AFA forum:

http://www.serviceacademyforums.com/showthread.php?t=17649&highlight=loan&page=2

There is a back and forth near the beginning of this thread regarding responsible use of the loan, and an alternative of forgoing the loan, but forcing yourself to invest what you would be paying on the loan, which is approximately $600 per month. Both ways are logical, but both need responsible behavior.

 

[dunninla]

Both ways are logical, but both need responsible behavior.

Indeed, however inexperience, youthful exhuberance, hormones, greed and ego can sometimes tear responsible behavior to shreds!

 

[America's Finest]

There is a back and forth near the beginning of this thread regarding responsible use of the loan, and an alternative of forgoing the loan, but forcing yourself to invest what you would be paying on the loan, which is approximately $600 per month. Both ways are logical, but both need responsible behavior.

I don't see how forgoing the loan and saving the amount you would have to pay back is a good alternative. By doing that, you will miss out on the compounding interest you would get investing a lump sum many years before. Am I missing something?

 

[Dixieland]

Indeed, however inexperience, youthful exhuberance, hormones, greed and ego can sometimes tear responsible behavior to shreds!

What was your cadet's decision? Was it a bad experience?

 

[Jcleppe]

I don't see how forgoing the loan and saving the amount you would have to pay back is a good alternative. By doing that, you will miss out on the compounding interest you would get investing a lump sum many years before. Am I missing something?

First, I was talking about the ROTC loan program which has a 3% interest rate. The COW loan at .5 makes investing much more desireable.

To answer your question. If you were to take the loan today and put it all in a mildly aggressive Mutual Fund, you would be starting with a market that is currently above 12600, rather high for times we are in now. To recoupe interest you would need to see the markets rise, any dip and you begin to lose. Putting 600.00 per month into investments (Dollar Cost Averaging) you now benifet from the ups and downs of the market. Say you invest 600.00 this month and the market drops 500 points in one month, you have lost a bit on the 600.00. Now you invest the second 600.00, only this time you are putting it in when the market is 500 points lower. If the market regains that 500 points your original 600.00 will be back and the second 600.00 you put in will now be worth more, hence you have made money. If you had put the entire 1200.00 in at the beginning you would have only recouped your losses and would have made nothing. Dollar Cost Averaging has proven itself to be a great way to invest for those that don't sit by the computer all day and Day Trade, it provide a great balance for up and down markets like we have been in for the past few years and that trend will probably continue. There will always be stories of those that put a lump sum in investments and made a killing, there are more stories of those who lost. Either way be smart and do your research.

 

[jocomom]

One advantage of taking the loan that has not been mentioned is building a favorable credit history. One of my kids who had a substantial nest egg was unable to secure a loan because she had never owed money. Successfully paying back a loan will come in very handy when it is time to apply for the first mortgage.

 

[PotentialParent]

I don't see how forgoing the loan and saving the amount you would have to pay back is a good alternative. By doing that, you will miss out on the compounding interest you would get investing a lump sum many years before. Am I missing something?

No, I don't think you are missing anything. Compounding interest is the difference. I thought it was a good discussion, but if it were me, I would do what you are in the process of doing.

This has been a good thread, because you usually hear about the loan and what different cadets do with the money, but not much about how they are going to make the $600 a month payment.

 

[scoutpilot]

No, I don't think you are missing anything. Compounding interest is the difference. I thought it was a good discussion, but if it were me, I would do what you are in the process of doing.

This has been a good thread, because you usually hear about the loan and what different cadets do with the money, but not much about how they are going to make the $600 a month payment.

Allow me to dispel the common cadet belief that their cow loan makes a fantastic investment vehicle and that is a wise choice to make. Your cow loan has one purpose: to fund your new life. The USMA leadership has not concocted this scheme as a way to give cadets a jump start on retirement. It's for things like a car, furniture, a deposit on an apartment, a class ring, a real adult wardrobe, kitchen utensils...the trappings of adult life.

Cadets get this loan because most of them need it. They aren't trust fund babies. Mom and dad may not have $5000 or $10000 to shell out to help their new LT get his life started. Since cadets can't get jobs in college, most would have no real savings without a loan like this.

Some will invest it, sure. Many will find that at the moment they need it, they have to take a loss. Investing borrowed money, especially when you'll need the capital on a short time horizon, doesn't always work well. Many of today's Cows will never deploy to a combat zone, and thus the sure moneymaking fallback my class enjoyed won't be there.

 

[America's Finest]

Allow me to dispel the common cadet belief that their cow loan makes a fantastic investment vehicle and that is a wise choice to make.

Common cadet AND USMA faculty belief. The instructors have said the same thing for the most part (investing it is a great idea) especially the Economics Department.

 

[Jcleppe]

Common cadet AND USMA faculty belief. The instructors have said the same thing for the most part (investing it is a great idea) especially the Economics Department.

Well, good luck with that then, sounds like you have it all figured out.

 

[Dixieland]

Allow me to dispel the common cadet belief that their cow loan makes a fantastic investment vehicle and that is a wise choice to make. Your cow loan has one purpose: to fund your new life. The USMA leadership has not concocted this scheme as a way to give cadets a jump start on retirement. It's for things like a car, furniture, a deposit on an apartment, a class ring, a real adult wardrobe, kitchen utensils...the trappings of adult life.

Cadets get this loan because most of them need it. They aren't trust fund babies. Mom and dad may not have $5000 or $10000 to shell out to help their new LT get his life started. Since cadets can't get jobs in college, most would have no real savings without a loan like this.

Some will invest it, sure. Many will find that at the moment they need it, they have to take a loss. Investing borrowed money, especially when you'll need the capital on a short time horizon, doesn't always work well. Many of today's Cows will never deploy to a combat zone, and thus the sure moneymaking fallback my class enjoyed won't be there.

This was a really good post, scoutpilot.

 

[Jcleppe]

I second that.

 

[M2inOR]

Scoutpilot chimed in with sage advice.

My yearling son and I have started the discussion at his insistence.

After graduation, our sons and daughters will be starting their adult journey with little or no credit history. They will have many expenses and will truly be on their own, perhaps for the first time. There will be deposits and purchases for the most mundane things. There may even be unanticipated expenses.

I advised my son to think about what he might truly need. Depending on his posting, he may not really need that "new car". It could become a very expensive toy, enjoying the confines of a storage locker while deployed.

As for investing, or really parking the money, choices are not limited to just stocks or mutual funds. One thing nice about USAA is their investment adviser side that can steer cadets and new lieutenants to safe investments that offer a higher rate than the loan interest, and still guarantee the principal.

 

[billyb]

Obviously there is alot of back and forth on this issue and there is no right or wrong answer. There were alot of my classmates that went out and bought a new car with it. It really depends on the person and how careful they are with money. If you are responsible with the money, then there shouldn't be any concern with taking the loan.

Here is what I did with my cow loan:

Loan amount: $25,000
Bought used car: $2500
Misc expenses after graduation: $2500
Down payment on new home at first duty station: $20,000

It worked out great for me, since I would have never had the cash up front to put that kind of money down on a home. I am not advocating buying a home at your first duty station, but it sure worked out great for me since I sold it for more than I bought it plus I had the equity in the home.

 

[dunninla]

As for investing, ... USAA is their investment adviser side that can steer cadets and new lieutenants to safe investments that offer a higher rate than the loan interest, and still guarantee the principal.

Well, that's the issue, I think. The stock market (S&P Index, NASDAQ Index, etc.) in some sectors has been break-even over the past 2 years. There are of course many times when it will be down as much as 20% for as much as a full year after an ill-timed investment, such as in 2008.

Long term CDs are paying under 2% at the moment.

Bonds, even those that might appear safe, sometimes default.

House prices over the past 70 years or so have advanced at about 4-5% per year, but it is not even. Some years see 15% appreciation, some see 20% declines. The point is it isn't "safe" or "predictable".

Gold: I saw Gold hit $1970 per ounce about three months ago, then dip to about $1,650. Had a cadet taken a Cow loan and put it into Gold, he/she would be 15% upside down right now.

My gut tells me this is a poor arbitrage opportunity. Sure a cadet could gain 25-50% in excess of the repayment obligation over 5 years. He/She could also los 10-25%. On average a cadet will gain, but no 5 year period is ever "average". If the money is not completely discretionary, the risk of loss is unacceptable to most 20-25 yr. olds.

 

[M2inOR]

As I suggested, best to contact an investment adviser. I am not one; just a successful investor.

There are many vehicles that may be suitable: ETFs, utilities, and master limited partnerships exist that have paid >>2% rate of return in the form of additional shares or outright dividends.

A quick look at the financial websites will reveal many alternatives that one can investigate further; i.e. Google finance, Yahoo finance, Microsoft Moneycentral to name a few. All have articles as well as quote information that shows current and past historical performance. Of course, there is always the disclaimer that past results are no guarantee to future performance.

That said, seek professional advice. It is all part of the learning experience.