Board approves modified debt calculation method for certain TSP loans in retirement plan

The Federal Retirement Thrift Investment Board (FRTIB) has issued a final rule on Wednesday, amending the reamortization rule for loans made from the Thrift Savings Plan (TSP). The rule change, proposed by Tanya L. Zucker, the General Counsel of the FRTIB on April 18, is expected to affect approximately 1% of all TSP participant loans.

Under the new rule, TSP loan reamortization may only occur when a federal employee experiences a change to their pay cycle or enters a nonpay status. This rule change aligns the TSP's procedures with the TSP record keeper's procedures for processing reamortized loan repayments.

Previously, the reamortization rule required that the employee first pay any accrued interest prior to outstanding loan principal or current interest. However, Wednesday's final rule combines the accrued interest and loan principal into a single figure repaid directly to the participant's account.

Repayments can be deducted from their paycheck, with approximately 100% of a participant's repayment, including both principal and interest, being paid to their TSP account. It is important to note that no additional loan fees are charged for a reamortization, and the TSP record keeper receives no monetary benefit from a loan reamortization.

While some respondents expressed concerns over the cost of compounding interest as a result of the change, the amended rule does not change the original terms of the loan during a reamortization. Concerns were also expressed that the reamortized loan would have a higher interest rate than the original, but these concerns have been addressed as the new rule maintains the original terms of the loan during a reamortization.

It is worth mentioning that under certain circumstances, such as a federal employee shifting payroll systems or returning from non-pay status, they would be allowed to reamortize their TSP loan. However, other respondents expressed concerns that the reamortized loan would have a higher interest rate than the original.

The FRTIB emphasised that the new rule aims to simplify the loan reamortization process for TSP participants and ensure consistency in the way loan repayments are processed. The Board encourages all TSP participants to review their loan terms and consider the potential impact of the new rule on their individual situations.