One option: Set up installment payments based on the original length of the loan. Image: Dontree_M/Shutterstock.com
By: John GrobeAbout a year ago, I noted that there had been a 25% increase in the number of Thrift Savings Plan Loans over the one-year period from September 2022 to September 2023. At that time, James Courtney, the Director of the Office of Participant Experience said that August of 2023 showed the highest number of new TSP loans in more than three years. This tells me that a lot of our readers might have outstanding TSP loans at this time.
In its booklet on loans, the TSP discourages us from borrowing against our retirement. That’s good advice, but there are some times when borrowing is necessary and the interest rate on TSP loans is a reasonable rate that is based on the G Fund’s return.
Some of the increase in loans is because participants may now have two general purpose loans outstanding at any given time. Up until 2022, participants could have two outstanding loans, but only one of them could be a general purpose loan. There are only two types of loans, primary residence, and general purpose. With the recent change in rules, a participant can now have two general purpose loans, as opposed to a general purpose and a primary residence loan. Because general purpose loans require no documentation (just your say-so), they are easy to get.
So what happens if you have an outstanding loan and you are planning on leaving federal service (either intentionally or unintentionally).
First, only employees can have TSP loans. Separated employees are not allowed to apply for any additional TSP loans and must resolve their indebtedness to the TSP after they separate.
If you end up leaving federal service with an outstanding loan, you will be given three alternatives.
You may:
Repay the loan in full shortly after separation.
Set up installment payments based on the original length of the loan; or
Have the TSP declare the loan to be a taxable distribution.
Take time to consider the effect of an outstanding TSP loan if you are separating.
But also consider alternatives to dipping into your retirement account(s) especially if your financing needs are on the smaller side, and more short term. That may include:
Credit Unions: These member-focused financial institutions often provide personal loans with lower interest rates and more favorable terms compared to traditional banks. (Pentagon Federal, Navy Federal offer personal loans – albeit at a higher interest rate.)
Online Lenders: Many online platforms such as Kashable (which caters to federal employees), offer quick and convenient personal loan approvals, catering to various credit scores and financial needs.
Peer-to-Peer Lending Platforms: These platforms connect borrowers directly with individual investors, providing an alternative to conventional financial institutions.
Credit Card Cash Advances: While often carrying higher fees and interest rates, this option can provide immediate access to funds in urgent situations, and help you avoid potential complications of repayment timeline.
Employer-Based Programs: Some companies offer employee emergency funds or payroll advance programs to help cover unexpected expenses.
Friends or Family: Borrowing from trusted friends or family members can be a flexible and low-cost solution, as long as clear repayment terms are established.
Community Assistance Programs: Nonprofits and local organizations may offer financial aid or no-interest micro-loans.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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See also
Alternative Federal Retirement Options; With Chart
Primer: Early out, buyout, reduction in force (RIF)
Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process
