Guest Post Wednesday: How to Smartly Use the USAA Career Starter Loan

This guest post is brought to you by Spencer at Military Money Manual.

(Nords note: I’d like to thank Spencer for mentioning that it was hard to search my blog posts by just the title. He pointed me toward the WordPress plugin Smart Archives Reloaded to generate a page which will list every post on this blog linked by month, year, and title. Use the sidebar link “All post titles– by month!” to the right below the “Recent posts” widget– or just bookmark this “All posts by month, year, and title” link. And thanks again, Spencer!)

Whether you’re in ROTC, at one of the Service Academies, or attending an officer candidate school, the time before you commission is exciting! You’ve worked hard for your entire life to get to this point. As a newly commissioned officer of the US military, you are going to do some amazing things and lead some incredible people.

One of the many benefits of military service is access to USAA’s line of financial products and services. Nord has written extensively about USAA and even got to attend their blogger conference recently. USAA offers many exclusive benefits to its military customers, one of which is the USAA Career Starter Loan, also known as the cadet loan, commissioning loan, or, at West Point, as the “cow loan.” Strange people, the Army…

What is the USAA Career Starter Loan?

The USAA Career Starter Loan is offered to cadets, midshipmen, and officer candidates. ROTC cadets can take it out a year before or after they are scheduled to graduate. Academy cadets can usually access it in their junior year. Officer candidates usually have to be within a few months of their commissioning date to access the loan.

The maximum loan amount ranges from $25,000-$35,000, at interest rates from 0.5%-2.99%. You can take any amount of the loan out up to the maximum and there are no early repayment penalties.

Payments are deferred until 6 months after your scheduled commissioning date. The loan is scheduled to be paid off in 5 years. For $25,000 at 2.99%, you’re looking at payments of $471 per month for 5 years starting 6 months after you commission.

This is a signature loan, meaning that there is no collateral. If you don’t commission, stop direct depositing your military paycheck into your USAA Free Secured Checking Account, or if you become late on your payments to USAA, the interest rate can jump to 18%. Ouch. So don’t get kicked out of your commissioning program in your senior year!

My Experience Applying for the USAA Cadet Loan

I first heard about the loan in 2008, as a sophomore in Air Force ROTC. The seniors were approaching their graduation and commissioning and were talking about the cars they were going to buy with “this awesome military-only loan from USAA.” I was excited. I had dreams of an awesome spring break vacation, maybe a summer trip to Europe, and buying a BMW before I reported to my first assignment.

In November 2008 I applied for and was approved for the loan. It was pretty exciting seeing $25,000 sitting in my checking account. I didn’t know what I wanted to do with the money just yet, so I let it sit in there until January 2, 2009.

After discussing what to do with the loan with a Charles Schwab financial advisor and well as my father, I decided I would invest $15,000 of it into the stock market and $10,000 into a CD ladder. At the time, the stock market was crashing and CD rates were 4-5% for all ages of maturation.

While I don’t believe in timing the market, I actually entered at a pretty good time. I let the money grow until my graduation in 2010. I sold my shares and used the proceeds to pay off one of my student loans which was at 6.8% interest. The $10,000 CD ladder I kept and used as the basis for my emergency fund as I entered active duty. (More details here.)

Now, almost 4 years after taking out the loan, I’ve finally paid it down to under $10,000. I should have the remainder paid off by Dec 31, 2013, almost 2 full years early, saving me hundreds in interest.

How to Smartly Use the USAA Commissioning Loan

There are many smart ways to maximize your mileage from the loan. If I was doing it again, here’s how I’d approach it:

1) If you have any consumer debt (credit cards, auto loans, etc) with a higher interest rate than 2.99%, take as much of the loan as you need to pay down that debt. Besides getting you a lower interest rate, it may get you a lower minimum monthly payment as well, because it will be spread over 5 years. This goes especially for ROTC students or officer candidates who have student loan debt. Get Sallie Mae or Direct Ed off your back and lock in a low rate with USAA. Student loans are usually paid back in 10 years, so by taking the USAA loan you’ll force yourself to pay them back in just 5 years, getting you debt free faster.

2) If you have no savings at the start of your military career, the USAA loan is a good way to stay out of credit card debt. The military pay system is often delayed or FUBAR when you first enter active duty, so you’ll usually have to cover expenses for a month or two before you start getting regular 1st and 15th paychecks. Don’t treat the money as free though! I would only take out $5000 to cover food, rent, gas, and other sundries and then pay it off as fast as I could once I start getting paychecks.

3) If you don’t have a car, you can use the loan as a car loan, but some of the car loan interest rates are even lower than 2.99% these days. Additionally, don’t blow all of the $25k on a new BMW! See what you need, shop around a bit, and for the love of God, don’t buy new unless you enjoy taking a 25% depreciation as soon as you drive off the lot. There are tons of quality used cars out there for under $10,000, and even some really nice ones under $5000.

4) If you’re thinking about buying a house, the money can be used for a down payment. This can be an attractive option, because the only debt I think is smart debt is asset backed debt. I haven’t heard of many officers doing this, but it is an option. Just make sure you do your research on rent vs. buying in your area, especially when you know you’ll be moving in a few years.

5) If you don’t have any debt and you have some savings to cover your first month or two on active duty, I wouldn’t take the loan. Think about what you could do with an extra $471 a month.

You could:

Fully fund your Roth IRA ($416.66 per month 2012, $458.33 per month in 2013)
Put the money away in a savings account and buy a $18,000 car in cash in 3 years
Take your spouse out for a $100 dinner every week
Buy a plane ticket home to see the family
Buy a lot of beer

Lessons Learned

Looking back on my experience, paying off my high interest student loan with most of the USAA Career Starter Loan was probably one of the smartest financial decisions I’ve made. Timing the stock market was just lucky. Not buying the classic “lieutenant-mobile” was also a good move on my part.

If I could do it again, I probably would take the loan out again, because of my student loans. But if I was smart enough to graduate without the student loan debt, I probably would not take the loan out. How about you? Did you take the loan out? If you did, how did you use it?

Ready to join USAA.com, and request your Career Starter Loan?

Spencer, a company grade officer in the US Air Force, is documenting his journey to financial independence using his military pay and benefits at the Military Money Manual.

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