How to Smartly Use the USAA Career Starter Loan

USAA Career Starter LoanDid you know that USAA offers newly commissioned officers a low-interest loan to help them start their career? This guest post on the USAA Career Starter Loan was written by Spencer, a company grade officer in the US Air Force. Spencer is documenting his journey to financial independence using his military pay and benefits at the Military Money Manual.

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 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, and request your Career Starter Loan?

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

  1. I used my Career Starter Loan as a down payment for a rental property. Because I save most of my pay, I was going to save that $450/month anyway, so I considered the ~$60/month in interest as the “cost” of pulling that savings a few years to the left so I could start building my real estate portfolio sooner. The cash flow from the rental covered about 40% of the monthly payment and when I factored in the principle pay down, it was closer to 60%. A couple of deployments helped stockpile cash for down payments on another couple of properties and I recently paid off the loan early because the next rental purchase won’t be until after the original pay off date and the 2.99% interest rate > 0.75-1% interest rate on savings account these days.

    I didn’t max out TSP contributions each year (just one year, with contributions in the others) but I’ve always maxed out an IRA or Roth IRA based on tax purposes (tax free zones, ftw!). It also started the clock on being a landlord so I reached the 2 years of experience on tax returns that helped me more easily qualify for my most recent mortgage.

    So, I agree that it shouldn’t be used for lifestyle purposes (aside from smoothing over the transition to the first duty station in case pay or travel reimbursement gets snagged), but if you’re smart with it, it can be a powerful tool to kick start investing.

    My 2 cents, anyway.

    • Thanks, Kevin, great advice!

      • I called USAA today in hopes of receiving the career starter loan to pay off student loan debt and was asked by the rep what I would use the loan for. When I told him I was planning to pay off my student loans, I was told the loan is not allowed to be used to pay student loan debt.

        Has this always been the case? If I were to call back and tell the rep I’m using it for a new car, but then use it to pay the student loans off, do you think I would get in trouble with USAA? Or do they not track what you do with the money after receiving it? Any insight would be helpful!

        • I’ve never heard that response from USAA before, RJ!

          It’s a bad idea to mislead an insurance company (let alone anyone else). You could call them back if you decide to use the loan for commissioning expenses like a security deposit on an apartment, possible deposits with utility companies, more uniforms, and travel expenses at your next command.

          When the money’s deposited in your USAA account, then the only way USAA could tell where you spend it is if you transfer it directly from a USAA account to that payee. Otherwise I don’t think they’d be able to track it.

          Stepping back from that question, here’s two bigger questions:
          1. Are you sure you want to borrow money…
          2. … and are you sure you want to pay off your student loans early?

          I would not rush to pay off a student loan if it was at a very low interest rate (<3%), or if it was eligible for programs like Public Service Loan Forgiveness or the various income-based repayment programs like IBR, ICR, PAYE, or REPAYE.

          I’d also hesitate to borrow money if those payments were higher than your current student loan payments. (By “higher” I mean “more dollars” when the loan is paid back in a shorter length of time.) You’d save interest expenses with a loan at a lower interest rate, but if the shorter amortization means a higher payment then you’d be under financial pressure to keep up the payments.

          You could achieve the same interest savings with your own additional higher payments. If you have unexpected financial issues then you’d still have the flexibility to send in the minimum required payment while you deal with the other financial issues... and then you could resume your self-imposed faster/higher payment schedule.

          When you’re just starting your military career (and a new pay record and new allowances and a new command) then I’d be very cautious about putting yourself under the financial pressure of taking out a career-starter loan. It might make sense to wait for a few months after commissioning (until your pay & allowances are running) before you set yourself up for a payback.

  2. Great post on using your career starter loan in a proper way. I myself saw how the misuse of the career starter loan can really set the start of financial life back. It is key to use this as tool to get out of high interest debt or jumpstart your retirement savings. I personally believe a good rule to live by when it comes to the career starter loan is 80/20. Save 80% in your retirement accounts, CDs, high interest savings, etc. and spend the remaining 20% on a well-earned treat like a vacation, going out if that’s your thing, down payment on a car, etc.. I personally like this rule because it admits human beings sometimes have lack of fiscal discipline, especially with such a large sum of money, and allows you to both save and splurge all at once.

    • It’s tempting to abuse even the 20% left over after investing!

      I think the biggest advantage of the career starter loan is using it for important life goals: paying off student debt and getting to the first duty station after commissioning (new uniforms, affordable transportation, deposits for rent, starter furniture). Investing it for gain is always speculative (because the loan has to be paid back in a relatively short time) and requires skills & patience (as well as low living expenses).

      As we’ve seen many times, it’s all too easy to fritter away the money– and that’s one heck of a debt hangover.

  3. I recall the many times my ships would come home and soon as the lines were over, sailors making a bee line out gate 1 at NOB Norfolk down Hampton Ave and Little Creek, to the rent to own shops, used car guys, all to ready to separate a sailor from their money. I have always seen sailor or military financial education or planning as important as any life survival gear we take to the field or sea. Money, access to capital is indeed power and freedom only if used property. Though not personally familiar with this USAA program the terms and conditions seem most beneficial. Having taken a signature LOC with NFCU in my past I can tell you such terms would not be forthcoming from them. Now only if USAA had set up shop at Newport when I got out of OIC in 1985, I would have had a decent ride to MAC Philly and beautiful Naples for my 1st tour, vice Amtrack. Came out pretty good though, bought a Volvo and had it shipped home at PCS.

  4. I was fortunate enough to get by without having to take out this alone. I think it can be a great thing for many people, but don’t abuse it. Buying a car is a horrible idea unless it’s an old beater. Use the money to pay for uniforms, high interest debt, and even student loans if they are at a higher rate.

  5. Thanks Spencer! I’ve never been able to figure out why so many people think their life is better with $15,000* more stuff (the average credit card balance). I can only understand taking out a loan to invest in something and you say it well–” the only debt I think is smart debt is asset backed debt.”

    Now to find out what the “Dunning-Kruger Effect” is?–Kruger_effect

    *December 7, 2012
    Average U.S. household consumer debt profile (of people who have debt):
    Average credit card debt: $15,418
    Average mortgage debt: $149,782
    Average student loan debt: $34,703

    In total, American consumers owe:
    $11.38 trillion in debt
    A decrease of 2.95% from last year
    $852 billion in credit card debt
    $8.15 trillion in mortgages
    $914 billion in student loans
    An increase of 7.35% from last year

    • Jay, speaking as another service-academy grad, there’s a good reason it’s known as a “car loan”. Most of my classmates counted their hot midshipmobiles as an “asset” while ignoring the “depreciating” aspect. I was tempted but I knew little about investing back then, so I parlayed a $6000 Grandma & Grandpa loan (at even lower interest rates) into a Mazda four-cylinder hatchback. I drove that compact all over two continents– and for nearly 13 years, until I was being paid at an O-4 rank.

      By the way, Jason, I’m pretty sure that the Dunning-Kruger Effect only applies to people who have never heard of it!

  6. I took out the cow loan and immediately plopped it into four USAA mutual funds. I was *lucky* that those funds wound up doing better than the interest rate (to be fair, the rate was about 1.5% from PNC Bank; I got a lucky draw, as those loans weren’t offered to everyone), and paid it off when I graduated.

    However, if I had it to do again, I wouldn’t take out the loan. Spencer has some good ideas for what to do with the loan if you already have debt, since you’re basically using the USAA loan to refinance higher interest debt with lower interest debt.


    If you’re at a military academy (as I was), you have almost no business being in debt. You have food, clothing, meals, you name it paid for. You even get a little stipend every month so that you can blow it at the Firstie Club (a place you’ll get to visit the year after the cow loan) or on leave. If you don’t have a car and need one, you can either buy a beater (like my $500 beater from high school) or you can barter with your friends to use theirs on weekends when they’re not using it. I traded CQ and then duty officer with friends quite a bit. Furthermore, if you’re wise with your spending while at Woo Poo U or the other academies, you’ll probably wind up with a nice little chunk of change in your Cadet Savings Account (or whatever they call it these days), which should tide you over until DFAS gets their gears rolling and that O-1 pay starts kicking in.

    Naturally, confirmation bias does take over in these situations. I had a classmate who parlayed his $15k loan (I think that was the amount) into $250k through daytrading and put himself through grad school at Stanford. That guy was super smart; I am not that smart. Don’t fall for the Dunning-Krueger Effect and think that you can do the same thing.

    Nice post, Spencer. I enjoyed reading it!

    • Thanks for the feedback, Hull. I like your thoughts on graduating the Academies debt free – I think it’s definitely an achievable goal that more cadets should know about! I think it’s hard sometimes when you’re in school to realize how fast your paycheck goes when you graduate. I remember thinking that I’d have cash to burn once I got on active duty – if only that were true…

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