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Is the USAA career starter loan a good deal for military officer cadets and midshipman? It depends. The interest rate is usually low, between 0.75% for military academy cadets and 2.99% for ROTC and OCS/OTS cadets. The amount of the USAA cadet loan is usually $25,000 to $36,000.
The USAA Career Starter loan program is offered to cadets and midshipmen commissioning through Army, Air Force, and Navy/Marines ROTC (Reserve Officer Training Corps) or through OCS/OTS (Officer Candidate or Training School). The terms and conditions change every year, so make sure you call or check with USAA for the most current information.
You may apply for the loan within the 12 months prior to commissioning if you are a ROTC cadet/midshipmen, or 4 months prior if you are an OTS/OCS attendee. If you already commissioned, you have up to a year from your commissioning date to apply for the loan, which is subject to credit approval. I've never heard of anyone being denied.
The first payment is deferred until 6 months after you commission, so if your EAD (Extended active duty) orders are delayed a bit you have that safety buffer.
This loan can be a powerful tool to get you started as a brand new officer. If you incurred any debt in college, such as credit card, student loan, or car loans, this can be your ticket to paying off that high interest debt with a low interest, fixed monthly payment loan.
Be careful that you don't get sucked into a cycle of debt though. This is not a loan that you should take out and then blow on a brand new BMW or Audi (“Lieutenant mobiles” are all too common in every service).
There are no early repayment fees on this loan, so you could take out the full $25,000, immediately pay back $15,000, and then use the $10,000 remaining to pay off credit card bills, get your first PCS started, or anything else you need to do.
Don't treat this loan as free money though! The monthly payments are $471 for five years ($25,000 at 2.99%)! As a 2nd Lieutenant or Ensign, if you're not being paid BAH this could be almost a quarter of your take home pay. Only take out this loan if you have a plan for what you're going to do with it. Trust me when I say that you're going to miss almost $500 a month for the next five years.
Did I take the loan? I sure did.
What To Do With USAA Cadet Loan
I applied for the USAA Career Starter Loan in November 2008. At the time, I was a junior in college and about 18 months from commissioning. It was quite the rush to see $25,000 deposited into my checking account.
From start to finish it took about a week to complete the loan application and have the cash deposited into my USAA checking account. I moved the money into a savings account within a day or two, and then began to think about what I wanted to do with the money.
I knew I wanted to invest most of it. At 2.99% interest, I was convinced that I could use the low interest rate to profit from arbitrage. I researched for a few days and then went into action.
Investing USAA Cadet Loan
My first step was to create a CD ladder. A CD ladder allows you to have greater access to your money while also maximizing your interest rate. I structured mine so that I would receive a payment every year for the next five years.
All the CDs were purchased through USAA and another bank in November of 2008, when interest rates were much higher than today. I invested $2000 into each CD and received the following returns:
1 Year CD – 4.25%
2 Year CD – 4.25%
3 Year CD – 4.5%
4 Year CD – 4.75%
5 Year CD – 5%
$10,000 total invested in CDs
As you can see, I was already making money off my 2.99% loan. At most I was making 2%, which barely covers inflation in even the lowest inflation years, so I wanted to increase my return on investment.
I waited until Jan 1, 2009 to start phase 2 of my plan. I took the remaining $15,000 I had from the loan and invested it in:
$3000 International Stock Mutual Fund
$6000 US Stock Mutual Fund
$3000 US Bond Mutual Fund.
I held on to the funds for 14 months. As I approached my college graduation and realized how much debt I was about to graduate with, I sold the funds for $17,000 and made about a 10% after taxes and paying the interest on my USAA loan.
I was able to pay off my Department of Education Direct Ed loans and knocked out nearly a quarter of my student loan debt before I even started working. These loans were over 6% interest as well, so paying them off with a 2.99% loan makes perfect sense.
My CD ladder has paid me $2000 + interest for 3 years running now, every November. I still have two more CDs maturing this year and next year. Since I can access the money and only give up a small portion of accumulated interest, I consider them the foundation of my emergency fund.
As each CD matures, I simply deposit the cash into a savings account, and so my liquid emergency fund grows every year. To be a true CD ladder I should reinvest the money into a new 5 year CD each time the CD matures, but rates as so low right now I'd rather just have immediate access to the cash.
Looking back on my experience with the career starter loan, I don't know if I would have taken it. On the one hand, having access to $25,000 cash at 3% is an excellent deal. On the other, making $471 payments every 15th of the month sucks. Two years after I've commissioned I've whittled down the loan to $13,000. Still halfway to go!
With today's very low CD and saving accounts rates, the arbitrage I described is no longer possible. If you have any kind of loan with an interest rate over 3%, it absolutely makes sense to take out this loan. If you don't, I think it would be best to just put your $471 (or just round it up to $500) every month in your emergency fund until it's topped off to 6 months of your expenses.
Or, if you're not putting away money in your Roth IRA, you can max it out every year ($5000 a year max) by simply depositing $416.66 a month in your account. This is very easy to do in MyPay, look for instructions in a forthcoming post.
Paying Off USAA Cadet Loan Early
In 2013, my wife and I reached another milestone in our journey to financial independence.
After 2 years, 5 months, and 26 days of repayments, I made the final payment on my USAA Career Starter Loan! When I started repaying the loan, it had grown to over $26,000. With payments of $471 over the next 5 years, I was looking at nearly $2300 worth of interest.
Just six months ago the loan was still around $10,000. At the time, I predicted we'd have the loan paid off by Dec 1, 2013. We beat that goal by over half a year and saved over $1000 in interest payments. How did we pay if off 6 months earlier than our already ambitious goal?
How I Paid Off Our USAA Cadet Loan In Less Than 3 Years
- Made extra payments towards our highest interest rate loan every month
- We didn't accumulate any new “stupid debt” (we did buy a condo)
- We increased our income
By saving money on deployment, never paying for cable TV, increasing our income with AirBnB, and decreasing our monthly expenses by over 25%, we were able to make the final push and pay off the loan over half a year early.
We were already paying almost 75% more per month than the minimum. Every month, on top of the $471 minimum payment, we'd make an additional $304 payment. This debt avalanche saved us about $1000 in interest and cut 2 whole years off of the life of the loan. With the final epic $5000 payoff, we were able to slay the evil beat once and for all!
Best Part of USAA Cadet Loan Payoff
The most exciting thing about paying off this loan is it freed up $775 of cash flow every month. Because I'm about to hit a time in grade promotion mark this month and we're about to finish paying off our PCS advance in July, we'll see our income rise while our expenses are falling! This is the perfect time to begin maxing out our Roth TSP and Roth IRA.
While I still have $29,000 in student loans from Sallie Mae, the interest rate on these loans is ridiculously low (1.75% and 2.75%). As long as the rates stay below 3%, we're not going to prioritize paying off these loans.
By paying off the USAA loan, our minimum monthly payment for student loans dropped from $696 to $225. This means we can live safely with a smaller emergency fund and start prioritizing our investments.
We're very excited to see the student loan payoff chart take a big dip this month. We're even more excited to have the opportunity to begin contributing to our gap fund and retirement accounts in a meaningful way now rather than later.
Read more about how a Coast Guard officer used his USAA career starter loan.
USAA Career Starter Loan FAQ
First, become a USAA member on this page here. Then, open a USAA checking account and start direct depositing your cadet paycheck into the checking account. Finally, apply for the loan online here or by calling 800-531-4610.
A Career Starter Loan is a $25,000 – $36,000 loan offered to military officers when they are cadets. The loan is low interest (0.75% – 2.99%) and designed to allow officer candidates to purchase the items they need to begin their military career, such as a car, uniforms, rent, laptop, and other necessary items.
Yes, if you are a contracted ROTC cadet and receive a stipend as part of your college scholarship, you are eligible for USAA.