New Officers and the USAA Career Starter Loan

The USAA Career Starter Loan offers newly commissioned officers an opportunity to borrow up to $25,000 to start their career. This includes students in the ROTC program, those attending a military academy, and newly commissioned officers coming out of Officer Candidates School (or the equivalent in other services).

You can take the loan out up to a year before you commission, or a year after. In order to take it out before commissioning you’ll have to get your command at the academy, or ROTC, to sign some forms to show USAA they have counseled you.

I haven’t heard of anyone in the PLC/OCC program being able to get the loan. If you have, please leave a comment and let others know!

What the USAA Career Starter Loan Gets You

The loan offers up to $25,000 to help start your career in the military. Starting a career means different things to different people, but some common decisions new officers make are paying off debts, buying uniforms which can amount to thousands of dollars, or making leisure purchases. We will go into more detail on each of these in a bit.

The appeal of taking out such a large loan from USAA is the comparatively low interest rate. I say “comparatively” because interest loans are currently low across the board, so I wouldn’t jump into this loan without researching other opportunities that may be available to you.

Contact USAA to get the most current rate. For the purpose of making calculations in this article we will assume a $25,000 loan at 3% over 5 years.

Loan: $25,000
Rate: 3%
Terms: 5 years
Monthly Payment: $449.22
Total Interest Paid: $1,953.04
Total Paid: 26,953.04

For those that don’t know what an amortization is, I suggest you take step into adult life and start learning about money. I got started reading books written by the greats. Two of my favorite and most recommended financial books are One Up On Wall Street by Peter Lynch and The Intelligent Investor by Benjamin Graham. Timeless advice that will jump start your interest in learning about money.

An amortization table shows how much of your monthly payment goes towards paying off the principal and how much goes towards interest. As the principal decreases, the amount of interest paid also decreases. About 60 bucks a month in interest to start isn’t bad at all. If you look at one of these tables on a home mortgage you’ll get sick to your stomach.

Understand Your First O-1 Paycheck

If you take the loan, you are dedicating $224.61 from each paycheck to paying back the loan. The first question you should yourself is, how much am I going to make once I commission?

According to the 2016 Military Pay Chart, O-1 pay with 2 years or less is $2,972.40. For prior enlisted officers, the O-1E pay is $3,740.10, but we are going to assume O-1 for these calculations.

If your thinking, “Sweet, 3k a month, $450 is going to be a drop in the bucket.” You forgot that Uncle Sam needs his cut. Let’s go into more detail.

Assumptions

• O-1 Pay
• Married and at The Basic School in Quantico, VA with BAH rate at $1,695
• 2016 Officers BAS at $253.63
• Spouse is unemployed and taxes filed jointly.
• Federal/state taxes take standard deductions into consideration.
• Resident of California

Your bringing in $59,052 while living in Quantico, VA. Not too bad considering a quick search told me the average salary in Virginia is $52,136. Now let’s take a look at what that money is going to cost you.

This is a comprehensive list of what your monthly expenses are going to be right off bat. I reviewed my LES to make sure I didn’t forget anything. Say goodbye to $5600.88.

You’ll be left with $4,454.29 a month before making your loan payment and $4,005.07 after you cough up the $450 bucks. That’s what you have to live off of if your married. You can actually find a place in Quantico for less than $1,000 which would mean you could pocket an extra $700. If your not married subtract out $1,695 for a rough estimate (taxes will differ), but you won’t have to pay rent.

Priority 1: Buy Uniforms and Other Essential Items

I know several Lieutenants who justified getting the USAA Career Starter Loan by telling themselves they needed the money to buy uniforms. The thought process is valid. For Marine officers, we are responsible for purchasing all of our uniform items. The utilities that we get out of OCS are paid for straight out of our paychecks. I know on the blue side they get a lot of uniform items issueed through the academy, or ROTC. I’m not sure about the Army or Air Force, but you get the idea.

So, how much are my sexy new Dress Blues going to cost?

Marines are going to have two places to shop for uniforms:

• The Marine Corps Exchange 
• The Marine Shop

For our analysis we are going to assume you are buying uniforms at the MCX. These are the MINIMUM requirements. Expect to spend at least another $500 on miscellaneous items such as boots, extra khaki shirts, multiple sets of rank insignia, etc.

Before you jump the gun and apply for the starter loan. I want you to know that both the MCX and Marine Shop do offer financing plans on uniforms. You may even be able to get 0% interest. No interest financing is a better deal than $25,000 at 3%.

Priority 2: Start Your Career Free of Credit Card Debt

Everything we have been talking about and will continue to talk about is reliant upon INTEREST. You absolutely must make decisions based on interest rates. This is key to being financially successful.

If you have credit card debt, PAY IT OFF FIRST! I don’t know of any credit card out there with below a 3% interest rate, so this is going to be a no-brainer. The only exception might be if you’ve consolidated your credit card debt under a no interest plan over a certain term. In this case, you must make sure that your prepared to pay off the debt before the no interest term expires.

I’m not going to go into a lot of detail here, but assume you have 1 credit card with a 15% interest rate (the average according to creditcards.com). Let’s also assume you managed to accrue $5,000 in debt buying pizzas and margaritas on the weekend while in college. At a 15% rate with a minimum payment of say $50 bucks, you could end up paying almost $3k in INTEREST ALONE.

You would have to be incredibly irresponsible to make only the minimum payment, but it puts things in perspective.

If you get the USAA Career Starter Loan, PAY OFF HIGHEST INTEREST DEBT!

Priority 3: Using the USAA Career Starter Loan to pay off Student Loans

The thought process here is the same as with priority 2. However, someone with low interest student loans may decide not to put their money towards this debt. I came out of college with about $11k in subsidized grants that had about a 3% interest rate. In this case, I would have to compare my opportunity to make money on the stock market against paying off student loans.

Priority 4: Investing in the Stock Market

Several years ago you could have taken a chunk of the career starter loan and put it towards a Certificate of Deposit which is essentially like giving a bank a loan. They pay you interest, but you don’t have access to the money for an agreed upon time. When rates were higher, you could put away money for 5-10 years at a rate greater than 3%. Unfortunately, a look at the last few years  shows that rates have fallen flat and are at only 1-2%. Such an investment with the loan is a terrible idea. You are agreeing to lose money, and would be better off paying the loan back early.

Similarly to CDs, other low risk investments like bonds are also not going to work out very well for you.

This leaves stocks. I’ll leave an in-depth conversation on this topic to another post. All you need to know is that you have to beat the interest rate of your loan to come out on top. The risk is that you could lose money in the stock market and be putting yourself worst off. This is a decision you need to make after doing some independent research on your options: stocks, mutual funds, ETFs, motifs, etc. The 10 year S&P 500 chart above offers some perspective on how volatile the market can be.

You will also need to decide if you want to keep your money liquid in a trading account, or invest in retirement through an IRA/401K/TSP.

Priority 5: Buying a Car with the Career Starter Loan

Now let’s talk about why you really started reading this article. You just graduated college and the old 2000 Toyota Corolla just isn’t doing it for you anymore. You’ve got about 20 bucks to your name, and purchasing a Tesla Model S is looking like an economical and financially responsible decision. No gas expenses, right?

More realistically, your probably looking at a Ford F150 and setting aside some cash to get a lift kit put in.

I will keep this simple. YOU CAN GET A GREAT RATE ON A NEW CAR PURCHASE!

The caveat is that you have to have decent credit, which I hope you do since your just getting out of school and starting your career. The first new car I bought with an optional 0% down, 0% interest, fully amortized over a 4 year period. The key statement there is fully amortized. Don’t be fooled into some 0% down, 0% interest, for the first 12 months sales pitch. Such a loan could come back to bite you hard after those 12 months.

First, shop around at your local dealer and see what they’re offering.

Second, check with USAA or another lender to see what kind of deals they have.

Lastly, if you can’t find a good deal out there you can consider using the USAA loan, but I caution you to be responsible and take care of coming expenses like uniforms and past debt first.