36k Career Starter Loan

[mjpen]

I am 20 y/o and my college has a special offer for students to take out a 36k loan at a 0.75% interest. Yes, 0.75%. I plan to open a Roth and max it out but not exactly sure what to do with the rest. Is there any suggestions to where to put this much money for long term gains? Thanks

[BolderBoy]

I am 20 y/o and my college has a special offer for students to take out a 36k loan at a 0.75% interest. Yes, 0.75%. I plan to open a Roth and max it out but not exactly sure what to do with the rest. Is there any suggestions to where to put this much money for long term gains? Thanks

Borrowing money to invest isn't usually a good idea. And you are biased by a market that seems to only go higher. Where will you be if you borrow, invest and the market tanks for the next 5-10 years?

What does the college "expect" folks who borrow the money to do with it?

[Grt2bOutdoors]

If you are employed and made $5,500 this year, you may contribute to a Roth, otherwise you may not. For maximum long term gains and a roller coaster ride - Small cap index only or Extended Market index or international small cap index or emerging markets index or small cap value index. Or just buy the entire enchilada- total world stock etf and call it a day.

[grabiner]

I am 20 y/o and my college has a special offer for students to take out a 36k loan at a 0.75% interest. Yes, 0.75%. I plan to open a Roth and max it out but not exactly sure what to do with the rest. Is there any suggestions to where to put this much money for long term gains? Thanks

Borrowing money to invest isn't usually a good idea.

It depends on the rate of the loan, and on the value of the alternatives. For example, it's usually a good idea to contribute to your 401(k) while you still have a mortgage.

And in this situation, borrowing to invest is a good deal, because you can earn a higher rate on the investment than on the loan without taking any more risk; you can buy CDs or Treasury bonds which are risk-free and are guaranteed to outperform the loan. You might also choose to take a bit of risk, such as Total Bond Market, or municipal bonds if you are in a high tax bracket and you don't have any tax-deferred space.

[rocket354]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

[mjpen]

I am 20 y/o and my college has a special offer for students to take out a 36k loan at a 0.75% interest. Yes, 0.75%. I plan to open a Roth and max it out but not exactly sure what to do with the rest. Is there any suggestions to where to put this much money for long term gains? Thanks

Borrowing money to invest isn't usually a good idea. And you are biased by a market that seems to only go higher. Where will you be if you borrow, invest and the market tanks for the next 5-10 years?

What does the college "expect" folks who borrow the money to do with it?

The loan is by no means required but is suggested since it's such a low rate. Some people spend it all on cars, traveling etc but i know the smarter move is to put the majority of it away since I don't necessarily need it.

[totallystudly]

What does the college "expect" folks who borrow the money to do with it?

Most people buy cars they can't afford with it, so investing and taking a 50% haircut in the market has a far better terminal outcome.

Over 10-20 years you should be waaaaaay ahead.

[MoonOrb]

I took out a career starter loan at a low interest rate when I was first employed. I invested it. If I were employed, I'd follow the conventional wisdom:

Invest up to 401k match
Max out Roth
Max out 401k
See if you can do a Mega Back Door Roth
Taxable investing

I'd also pay down student debt with it if you have any as another option.

For long term gains, I'd just put it in Total Stock Market or S&P500 Index, or whatever else fits your asset allocation.

If you're not employed, it's not so much a question about investing as it is about personal finance and there's not enough information here to help you make a good decision.

If you think the odds of stable employment are high, this is a no-brainer and I'd take out this loan. If you're unemployed or don't expect stable employment, it's a different situation despite the fabulous interest rate.

[mjpen]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

[abracadabra11]

Pretty certain this is a career starter loan that is offered by NFCU and/or USAA for those enrolled at service academies.

I'll tell you what I did with mine more than 10 years ago - Roth and Mutual Funds as recommended by my then-financial adviser. I built an early habit of saving aggressively and investing and it all started with that career starter loan. Do the same - except skip the financial adviser and go straight with a 3-fund index portfolio as recommended here.

[abracadabra11]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Not sure where you're pulling the 60-100k salary post graduation - O-1, Pensacola BAH, BAS, and Flight Pay comes out to $55649.16/year. You won't hit $100k until you're an O-3.

[Helo80]

Do you have a link to the program your college is running so that we can investigate the terms and conditions for you? It's not like we're going to hunt you down as you are one of thousands of students, right?

Giving 20 year olds $36K at 0.75%... I don't know if you can even get a collateral rate that low... You sure wouldn't be able to get an unsecure loan for that rate.

I'll put it to you this way --- taking the loan and putting it in an S&P500 Index fund is much better than a car (will drop like a bucket in value) or traveling (just memories, but money goes down the drain). But, if there's a market retraction and you lose 20%... it's kind of stressful to cover $7200+.

Effectively, you're asking to do a form of margin trading and I don't think you'll find too many fans here.

[MoonOrb]

Yeah I had the same career starter loan as a naval officer (it was just not nearly as much money back then). Max out your TSP and a Roth and invest the rest in a taxable account. Buy a cheap car. Thanks for your service.

[Helo80]

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

If it's classified as Earned Income than you can put every dollar you earn into a Roth IRA (Up to $5500).

[Helo80]

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Who is the loan through? DoD? The Navy?

[mjpen]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Not sure where you're pulling the 60-100k salary post graduation - O-1, Pensacola BAH, BAS, and Flight Pay comes out to $55649.16/year. You won't hit $100k until you're an O-3.

Submarine officers with +15k bonus initially and more bonus after power school but not really interested in that route

[mjpen]

Do you have a link to the program your college is running so that we can investigate the terms and conditions for you? It's not like we're going to hunt you down as you are one of thousands of students, right?

Giving 20 year olds $36K at 0.75%... I don't know if you can even get a collateral rate that low... You sure wouldn't be able to get an unsecure loan for that rate.

I'll put it to you this way --- taking the loan and putting it in an S&P500 Index fund is much better than a car (will drop like a bucket in value) or traveling (just memories, but money goes down the drain). But, if there's a market retraction and you lose 20%... it's kind of stressful to cover $7200+.

Effectively, you're asking to do a form of margin trading and I don't think you'll find too many fans here.

It is the USAA career starter loan

[Helo80]

It is the USAA career starter loan

Ok... well, I would probably do the same as you then... take the loan at 0.75 points and then invest it immediately. You'll have a stable job and source of income so there's less concern about your ability to pay back said loan (which is why you can get it at 0.75%).

[rocket354]

Absolutely. Take the loan. I don't know about your specific employment situation having never been in the armed forces, but max your Roth and any other retirement accounts that you can. Then put the rest in Total Stock Market and Total International in whatever split makes sense to you. I like to avoid fees, so $10k+ in any one fund gets you admiral shares at a lower expense ratio. Therefore an example distribution might be:

$5500 to Roth at whatever allocation you currently have, or want
$10,000 to Total International Stock
$20,500 to TSM

Then forget about it and enjoy your school, the start to your career and when it comes time to make a down-payment on a house or buy a (necessary) car you'll be in great shape.

[Cunobelinus]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Not sure where you're pulling the 60-100k salary post graduation - O-1, Pensacola BAH, BAS, and Flight Pay comes out to $55649.16/year. You won't hit $100k until you're an O-3.

It's widely known that the USNA creates superior Naval Officers -- far superior than any other commissioning source. It's less widely known that there are special set of pay tables to reflect the superiority of those USNA graduates.

Note: one or both of the previous statements are complete malarkey, depending on whether or not you're affiliated with the USNA.

Edited for grammar. Clearly not a USNA graduate.

[hale2]

What's the repayment term of the loan? When does repayment start? What are the other fees associated with it?

If those other questions check out, it sounds like a great deal. You would be taking risk, of course, but likely worth it. If you are working some just to make ends meet or for a little extra pocket money, having that money out to be able to contribute to a Roth is great (or maybe enticement to get a job that pays that you can then make a contribution and still have some money).

With the rest, I would dump the money into a TSM fund and maybe some into total international, and see where it goes. You might lose some money if the market tanks for an extended period, especially if the repayment term is short, but you're much more likely to make money and these are the kinds of calculated risks you should be comfortable making, especially at your age. If you make enough +EV choices over your life you'll come out way ahead, even if a couple of them are duds.

Good luck!

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Take it. Everyone I know took it. Yes, most people wasted it on a car that they wouldn't be able to drive much their first class year and would spend most of the next few years being parked while they are at sea, but many people invested at least some of it. We invested in the summer of 1987, and of course Black Monday was a few months later. But almost 30 years later it's worth much more. How times change, it was a great deal at 5% back then.

[hightower]

A "career starter loan" should be renamed "career extender loan." Because all it will do is guarantee that you have to work at least that much longer! DO NOT TAKE OUT A LOAN JUST BECAUSE IT HAS A LOW INTEREST RATE!

This is the dumbest financial move anyone could possibly make early in your career. I don't want to hear all the bs about you'll beat the interest rate in the market and blah blah blah. You don't even have a job yet and you want to go into debt because you think you will "get ahead." NO! And I can't believe people are actually saying to take it because "everybody I knew took it." Would you jump off a cliff if everyone else did it? Come on! That's not a reason to go into $36k of debt.

Be smarter than all of your colleagues who are taking out a loan for no reason. Say no thanks. Also say no thanks to any other loan you can. When you start making money, assuming you're otherwise debt free, you'll be able to keep all of the money you're paid and you can start pouring it into retirement accounts paying yourself, not a bank. Meanwhile all of your colleagues who took the loan will have to have a portion of their paychecks signed over to a bank each month. You will be able to smile and buy your hot girlfriend a vacation each year with the money that you're saving and not spending on a pointless loan!

Take it from me, debt sucks. It doesn't matter what the interest rate is. You still have to pay it all back. You should always avoid debt whenever possible and this is an example of a debt that you absolutely don't need.

[totallystudly]

This is the dumbest financial move anyone could possibly make early in your career. I don't want to hear all the bs about you'll beat the interest rate in the market and blah blah blah. You don't even have a job yet and you want to go into debt because you think you will "get ahead." NO!

Hightower you don't know what you are taking about. The poster is pretty smart as he is at USNA...of course if he were really brilliant he would have gone to west point, but I digress...

You are missing the point that HE HAS A JOB, now and guaranteed in the next 5 years with full benefits and the loan term is set to be paid off before his commitment is done.

If you don't want to hear that he will beat the interest rate in the market, which he almost certainly will do over the next 5 years, you aren't looking at this from a math perspective and have an irrational and emotional response to debt.

He will absolutely get ahead investing 36k now in a higher returning investment vehicle such as stocks or mutual funds vs investing the loan payments over the next 5 years.

[whodidntante]

I would take a loan at 0.75% fixed, in the largest amount that I could support from a cash flow/liquidity point of view. That is a negative real interest rate which makes the loan profitable (yes, loans can be profitable). Instead of being super concerned about what these specific dollars go towards, remember that money is fungible and now you have more of it available. So I would use it to do the same things that I would do with the rest of my money. Some things you could do:

Use it to fund a IRA, HSA, or 401k up to the max. You'll need earned income to contribute to an IRA or a 401k.
Use it to pay off high interest debt.
Use it to buy investments in a taxable account.
Use it to pay expenses that you would have needed to pay anyway.
Use it to buy property you need, or as an investment.

If the loan negatively impacts your behavior, i.e., you buy a jet ski that you did not need and would not have otherwise bought, then it can be a wealth destroying thing. But if you act rationally and you can afford to take the risk, it can be a good thing. That said, 36k isn't a lot of money, so the maximum benefit will be limited.

Look for gotchas in the loan terms. Short loan term, origination fees, call provisions, and punitive interest rates for missing a payment.

[BolderBoy]

I am required to 5 years of military officer service and the money will be deducted from my monthly pay automatically. To clear up confusion, I attend the US Naval Academy and the loan is offered to all midshipmen (students). We are considered active duty right now and employment is no issue; we get paid $100-400 a month for going to school (money dependent on class year) . Upon graduation, salary will jump up to 60-100k. I fully intend to take the loan yet have no dire needs to use it.

Heavens. It sure helps to have the WHOLE story...

[BolderBoy]

I am 20 y/o and my college has a special offer for students to take out a 36k loan at a 0.75% interest. Yes, 0.75%. I plan to open a Roth and max it out but not exactly sure what to do with the rest. Is there any suggestions to where to put this much money for long term gains? Thanks

Borrowing money to invest isn't usually a good idea.

It depends on the rate of the loan, and on the value of the alternatives. For example, it's usually a good idea to contribute to your 401(k) while you still have a mortgage.

And in this situation, borrowing to invest is a good deal, because you can earn a higher rate on the investment than on the loan without taking any more risk; you can buy CDs or Treasury bonds which are risk-free and are guaranteed to outperform the loan. You might also choose to take a bit of risk, such as Total Bond Market, or municipal bonds if you are in a high tax bracket and you don't have any tax-deferred space.

Where were you in 1999 when so many folks needed counseling about taking out second mortgages to "invest in the market"?

[soupcxan]

[deleted]

[abracadabra11]

A "career starter loan" should be renamed "career extender loan." Because all it will do is guarantee that you have to work at least that much longer! DO NOT TAKE OUT A LOAN JUST BECAUSE IT HAS A LOW INTEREST RATE!

This is the dumbest financial move anyone could possibly make early in your career. I don't want to hear all the bs about you'll beat the interest rate in the market and blah blah blah. You don't even have a job yet and you want to go into debt because you think you will "get ahead." NO! And I can't believe people are actually saying to take it because "everybody I knew took it." Would you jump off a cliff if everyone else did it? Come on! That's not a reason to go into $36k of debt.

Be smarter than all of your colleagues who are taking out a loan for no reason. Say no thanks. Also say no thanks to any other loan you can. When you start making money, assuming you're otherwise debt free, you'll be able to keep all of the money you're paid and you can start pouring it into retirement accounts paying yourself, not a bank. Meanwhile all of your colleagues who took the loan will have to have a portion of their paychecks signed over to a bank each month. You will be able to smile and buy your hot girlfriend a vacation each year with the money that you're saving and not spending on a pointless loan!

Take it from me, debt sucks. It doesn't matter what the interest rate is. You still have to pay it all back. You should always avoid debt whenever possible and this is an example of a debt that you absolutely don't need.

So much bad advice here.

Agreed. There are plenty of officers on sound financial footing that were bolstered by their career starter loan.

[pilot_error]

Take the loan.

I assume you are already maxing R OTH, the challenge I didn't figure out in your position (a decade ago) was maxing TSP. If you truly wanted to max perform your finances, get your TSP started and divert a high percentage of your pay to max out the $18K ROTH TSP. That will take a few trips to a real base finance office, there is a chance the cadet finance people won't be able to navigate that process for you. (Does anyone know if cadets are even eligible for TSP? Anyway, do it ASAP)

I also regret not going paragliding on my 60 days trip... so if there is a "bucket list" type experience that gets harder with age, don't be afraid to take advantage of this literal once in a lifetime opportunity.

[warner25]

First, as I think you know, this isn't offered by your college, it's offered by USAA and it's not charity. They are trying to hook you as a customer, because the terms of the loan (I believe) include direct deposit of your paycheck to your new USAA checking account. USAA also hopes that you'll buy a new car and use them for insurance, and invest the remainder in their mutual fund family.

With that said, I took the ROTC version of the loan ten years ago ($25k at 1.9%) and it provided some helpful liquidity during the period where I was graduating, moving into a new apartment (putting down a deposit, first and last month's rent, and realtor's fee), and buying a new car while waiting for DFAS to start paying me. I also put a good chunk of it into some USAA mutual funds.

After a year, I realized that USAA is pretty good for banking and insurance (still where I do business), but not investments, so I moved my IRA and other savings to Vanguard, and started contributing the max to the TSP. After another year, I paid off the balance of the USAA loan early because I realized that my cash was now earning far less than 1.9% in the wake of the financial crisis.

I know some folks who invested almost the entire sum (in mostly individual stocks), and they obviously took a big leveraged hit in 2008-2009, but if they stayed-the-course I suppose they've probably done OK by now. Folks in the class of '99 who did this with .com stocks probably never recovered. Other classmates locked in a 5-year 5% CD in 2007-2008 and were probably very happy with that.

[hightower]

A "career starter loan" should be renamed "career extender loan." Because all it will do is guarantee that you have to work at least that much longer! DO NOT TAKE OUT A LOAN JUST BECAUSE IT HAS A LOW INTEREST RATE!

This is the dumbest financial move anyone could possibly make early in your career. I don't want to hear all the bs about you'll beat the interest rate in the market and blah blah blah. You don't even have a job yet and you want to go into debt because you think you will "get ahead." NO! And I can't believe people are actually saying to take it because "everybody I knew took it." Would you jump off a cliff if everyone else did it? Come on! That's not a reason to go into $36k of debt.

Be smarter than all of your colleagues who are taking out a loan for no reason. Say no thanks. Also say no thanks to any other loan you can. When you start making money, assuming you're otherwise debt free, you'll be able to keep all of the money you're paid and you can start pouring it into retirement accounts paying yourself, not a bank. Meanwhile all of your colleagues who took the loan will have to have a portion of their paychecks signed over to a bank each month. You will be able to smile and buy your hot girlfriend a vacation each year with the money that you're saving and not spending on a pointless loan!

Take it from me, debt sucks. It doesn't matter what the interest rate is. You still have to pay it all back. You should always avoid debt whenever possible and this is an example of a debt that you absolutely don't need.

So much bad advice here.

So u disagree with me, fair enough. But telling someone not to go into debt simply because it’s “cheap” is not “so much bad advice” Considering that many here have admitted that most of these guys take the loan and blow it on a new car proves my point. However if there are well disciplined financially motivated people taking the loan and using it as leverage fine, what do I care. I’m just making the point that going into debt simply because it’s cheap is a slippery slope.