The TSP Loan Guide, Part 3: Eligibility and Application for TSP Loans


Are you eligible for a TSP loan?

You can borrow from your Thrift Savings Plan account if:

  1. You have at least $1,000 of your own contributions and associated earnings in your account. Agency contributions (and earnings on that money) cannot be borrowed.
  2. You are currently employed as a federal civilian employee or member of the uniformed services. (Separated or retired participants cannot obtain a TSP loan.)
  3. You are in pay status. For civilian TSP participants, non-pay status includes leave without pay and furlough.
  4. You have not had a taxable distribution on a TSP loan within the past 12 months, unless the taxable distribution resulted from your separation from Federal service.
  5. You can borrow from your Thrift Savings Plan account even if you have stopped contributing your own money.
  6. You can only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time.
  7. You have not repaid a TSP loan of the same type in full within the past 60 days. (If you have both a civilian TSP account and a uniformed services TSP account, the 60-day waiting period applies separately to each account.)
  8. You must not have a court order against your TSP account.

How Much Can You Borrow with a TSP Loan?

You can borrow your own contributions and earnings on your own contributions in the Thrift Savings Plan account from which you intend to borrow, not including any outstanding loan balance up to $50,000, minus your highest outstanding loan balance, if any, during the last 12 months. Even if the loan is currently paid in full, it will still be considered in the calculation if it was open at any time during the last 12 months.

For example, if you took out a loan for $35,000, then paid the loan back in full seven months ago, the maximum loan amount you would be eligible to borrow would remain $15,000 ($50,000 minus $35,000, the highest outstanding balance during the last 12 months) even though the money has been returned to your account.

If you have both a civilian account and a uniformed services account, the combined account balances and outstanding loan amounts will be used to calculate the maximum TSP loan amount.

The easy way to see how much you can borrow is to log into your account at www.tsp.gov and click on TSP Loans under Online Transactions. The website will immediately display the current interest rate and the amount of the loan which is available to you. You can also call the ThriftLine at 877-968-3778.

How long can you take to pay off a TSP loan?

The Thrift Savings Plan issues two types of loans: (1) general purpose loans which don’t require documentation and must be repaid within five years, and (2) loans for a personal residence (TSP home loans), which require documentation and which you can take up to 15 years to repay. You have to start paying off both types of loans within 60 days of borrowing the money.

I don’t believe that there is any scenario under which you should be stealing from your retirement for more than five years (and considerably less than that except in extraordinary circumstances), so I do not address the use of the more cumbersome personal residence TSP home loan in this guide.

What Fees are Charged for a TSP Loan?

You will pay a fee of $50 per loan, which will be subtracted from the total borrowed amount. For example, if you want to borrow $10,000 from your Thrift Savings Plan, you will receive a check for $9,950. While this fee is very small compared to that charged for many other types of loans, note that a $50 on a one year, $1000 loan results in an effective fee of 5%, so it is not generally cost effective for small loans.

What Will the Interest Rate be on a TSP Loan?

The interest rate you will pay for the life of the loan will be the same as the rate paid by the TSP G Fund on the date of your loan. This rate has averaged about 1.77 percent above the three-month Treasury bill rate. This means you are paying a very modest premium over short-term treasury bond rates to take out a medium to long-term (five to fifteen years) loan. Because you are paying this “interest” to yourself and effectively just contributing to your savings, you are in many respects receiving an interest free loan.

How much will be Deducted from Each Paycheck?

If you want to calculate your expected loan payment on a TSP loan, you can use the TSP.gov online calculator.

What if I’m married or divorced?

Your spouse has rights to a portion of your Thrift Savings Plan account and a former spouse might have rights as well. The FERS program requires written spousal consent, but the Civil Service Retirement System (CSRS) only requires you to notify your spouse of the loan. If you have exceptional circumstances (such as not knowing where your spouse is), you can apply for an exception to that requirement. If you are divorced or legally separated and the court settlement awards your spouse/former spouse a portion of your TSP holdings, or places a hold against your account for child support or alimony, you might be ineligible for a loan.

How to Apply for a TSP Loan

tsp_loan_guide_cover_-_tsp_allocation_guideThe simplest way to apply for a Thrift Savings Plan loan is electronically, at www.tsp.gov. To access the TSP loan application, log into the My Account section and select “TSP Loan”. Depending upon your retirement system coverage (FERS, CSRS, or uniformed services), marital status, type of TSP loan, and how you want to receive the loan payment (by check or direct deposit), you will either be able to complete the TSP loan application process online, or you will be instructed to print out the partially completed TSP Loan Agreement, complete the form, and mail or fax it to the TSP (with any additional required information). The TSP must receive the TSP Loan Agreement before the expiration date at the top of the agreement.

For more information on TSP Loans:

The Thrift Savings Plan has an excellent booklet which goes into greater detail on several less common issues which you can view here:

TSP LOANS

If you have any questions or comments on this guide, please start a discussion on the message board or leave a comment. And as always, if you found this guide useful, please point your friends and colleagues towards this site.

Return to Part 1: When Should You Consider a TSP Loan?

Return to Part 2: Pros and Cons of TSP Loans.

 

8 thoughts on “The TSP Loan Guide, Part 3: Eligibility and Application for TSP Loans”

  1. I have about $10,000 in Stafford loans at around a 7 percent interest rate. I am considering taking a loan from my Thrift Savings Plan account to pay off part of my balance as the interest rate I would pay back on the TSP loan is a lot lower than my student loans. I am 26 years old and have approximately $12,000 in TSP, so I could pay off $6000 of my loans instantly and save a lot of interest over the next few years. Good idea, bad idea?

  2. While I can see where it might be tempting to eliminate a chunk of your debt right now, lets do a little back of the envelope math and see how this plays out.

    Scenario 1:
    You take out a TSP loan for $6000 and apply that to your student loan, and pay off the remaining $4000 over the next ten years at 7%, you will pay approximately $5572 (your principal plus about $1572 in interest).

    Scenario 2:
    You don’t take out a TSP loan and pay off your loan over the course of the next ten years at 7%, you will pay approximately $13,900 in total (your principal plus about $3900 in interest).

    So you would save about $2328 in interest over that time, which is certainly a good thing. But don’t forget that your Stafford loan is almost certainly tax deductible (at your age and with the amount you have in your TSP, you are very likely not over the limit for the student loan interest deduction), so let’s lop off about $500 of that interest savings for tax deductions which you now can’t take for a total of about $1800 in savings. And you have to come up with the “interest” which you pay to yourself on the TSP loan, so subtract another $370 from that.

    Now let’s look at the impact on your TSP balance. If you pay off the TSP loan over five years, you will wind up paying back $6,370. Of course as each payment is made, that money is invested and begins to compound, so you will wind up with a bit more than that at the end of the five year period – let’s be very optimistic and generous and say that you wind up with $8,500 added to your account as a result of paying back the principal and the compounding of the principal and earnings at the end of those five years.

    Compare that to $6000 compounding at 10.6% (the market’s average return over the past 25 years) for five years. That would give you $10,169.

    That $1600 doesn’t seem like a lot. But if you are 26 now, you may still have 30 years of earning and compounding ahead of you at that point. That extra $1600 compounding at 10.6% for 30 years turns into about $37,941 by the time you are ready to retire.

    1. Those tax deductions don’t apply if you make over a certain amount of money. Most federal employees make too much money to take the tax deduction for the student loan interest.

  3. Hello, right now I have $70,000 in my TSP account. I was thinking about borrowing 50% of that amount to buy a home for my primary residence.

    In 2010 my credit went down the drain, since I short sold a home. No one at the moment will give me a loan to purchase a home unless I put down 20% down. I would like to use the TSP loan to put down this 20% and try to repay it in 5 years. Is this a good idea?

    I’m 29 years old and still have 20 years of federal service to go. I figure that I should invest in a property now instead of keep on paying rent to my landlord which is $1100 a month.

    how much money would I lose if I do this? Lately my PIP in TSP has been for the last 3 years 20% +.

  4. Hypotheically – Several household emergencies cause my emergency fund to be depleted and now the car needs major repairs. I have a significant balance in my TSP, say 250K (not really). If I borrow 10K from my TSP to pick up another vehicle and I still able to invest the remaining 240K in the TSP funds of my choice? And, am I still able to contribute 18% of my salary to the TSP?

    I seem to remember, from a previous private employer, that if you borrowed against your 401K, you were unable to contribute to the plan until the loan was paid in full. But that could have been a restriction for that employers plan.

    Thanks

    1. That must have been specific to your old 401K. Taking out a TSP loan has no impact on your ability to make contributions or invest in the fund of your choice.

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