TSP Loans: Interest Rates and Repayments

We covered some preliminary requirements and “how-to's” for TSP loans during our last few articles.  This week we'll cover a couple of areas that are vital considerations of any type of loan program: interest rates and repayments. 

For some loans, interest rates can be very confusing, as they may involve the LIBOR, margins, adjustment caps and other confusing financespeak.  Fortunately, interest rates for TSP loans are about as easy at it gets.  They are simply based on the G Fund rate at the time your application is processed.  You'll continue paying this rate for the entire life of the loan. 

It's way beyond the scope of this article to get into Fed policy and interest rate forecasting.  However, it's worth mentioning that you should consider overall interest rates before getting any type of loan.  If they're at extremely low levels, as they were a few years ago, loans are obviously more appealing.  If they're at historically high levels, like in the early '80s, you may want to hold off on a loan. 

You repay your TSP loan through payroll deductions.  These deductions occur through the entire payment period of your loan.  You can also make additional payments to prepay your loan early without any penalties. 

It's possible that your agency or service may miss your loan payment.  Perhaps it was because of a transfer, leave without pay or just a plain ol' mistake.  Regardless of the reason, it's up to you to make up the payment. If not, you may get stuck with a taxable distribution on the unpaid balance, including unpaid interest.  It can get even worse--you may have to pay the IRS a 10% early withdrawal penalty tax. 

If you're in this situation (or even think you may be), contact the TSP Service Office ASAP to find out what you may owe.  Alternatively, you can go to this website: http://www.tsp.gov/account/index.html.

Click“Account Transactions” and once you're in the Account Access menu, choose “Loans” then “Outstanding Loans.”  

If you'd like to reamortize your loan to change your payment amount, the length of your term or your  pay cycle, you can do so as often as you'd like.  Your only restrictions are the maximum lengths of  terms allowed (5 years for general purpose and 15 years for residential loans).

Finally, if you leave the Federal service, you must fully repay the principal and interest on your TSP loan. If not, you'll get one of those nasty taxable distributions we mentioned earlier.  You'll also get one against your estate if you have an outstanding loan at the time of your death. 

That's it for this week.  Until next time, have a nice and safe Memorial Day weekend.   

John, AKA “SystemTrader”