Q. 1. I have $12,000 in student loans at about 6.5 percent interest rates. I had considered taking a loan from my Thrift Savings Plan account to pay off my balance as the interest rate I would pay back on the TSP loan is lower than my Stafford Loans. What is the maximum amount one can take out on loan from their TSP account? What is the repayment time frame demanded by TSP?
2. If I were able to pay off my Stafford loans with a TSP loan, I am not sure that would be the best decision. I am 26 years old and have approximately $15,000 in TSP. I know that money makes money over time and I can’t make up past years. If I take the funds out, I am losing some potential for the funds to work for me and increase themselves. Do I want to leave the money brewing where it is in the hopes it will bring more for my retirement, or take it out now and be debt-free and save myself some interest from my student loans. Are there any other factors that merit consideration?
3. I am looking into buying a house and want to know if a loan from my TSP account shows as part of my debt-to-income ratio. I have been considering taking out a TSP loan to pay down my student loans to lower my debt-to-income ratio to improve my home loan prequalification odds. Can you tell me if a TSP loan would be part of that ratio even though the loan is paid back to myself?
A. The maximum TSP general purpose loan amount is the smaller of 50 percent of your 12-month rolling average account balance or $50,000. The repayment period is five years, but you may reamortize the balance to extend the repayment term.
Whether or not you take the TSP loan depends upon a number of factors including the cost of the other debt, the cost of the TSP loan and your behavior.
You should check with your lender to see what, exactly, they count in underwriting your mortgage application. I suspect that they’ll want to consider all of your debt.