Options for Federal Employees Who Need Money

Some federal employees are borrowing money from their Thrift Savings Plan. That provides a great interest rate but there are disadvantages that could impact your future retirement income. If you need a loan, or want to loan money as an investment, there may be another alternative as federal employees are often a good credit risk.

As a federal employee, you are probably aware of most of your benefits ranging from the Thrift Savings Plan (TSP) to participation in the Federal Employee Health Benefits Plan (FEHB) along with a generous leave system and good job security.

You can even get a loan from the Thrift Savings Plan (TSP) at a very good rate. The interest rate you pay for your loan from the TSP is the interest rate for the G Fund at the time your application is processed. The interest you pay on the loan will go into your TSP account, along with repayments of the loan principal.

Apparently a number of participants in the Thrift Savings plan have a need to borrow money. There is currently about $7.2 billion in outstanding loans from the TSP.

But there is a disadvantage of borrowing money from your TSP. That money in your account is for your future retirement. And, when you get the loan, the money is removed from your TSP account. You lose the earnings that would normally accrue in your account while the money is in your hands.
While the money is put back into your account when your loan payments are posted, you are probably going to have less money in your account for your future retirement than you would have had if the money had stayed put.
For some people, they may end up paying more for their loan than they realize. This information from the TSP website explains why:

"Some participants ask about the "double taxation" of the interest portion of their loan payments. Here is the reason why this occurs.

When Congress enacted the Tax Reform Act of 1986, it specifically provided that ‘no deduction is allowed with respect to interest paid on [a loan from a qualified plan like the TSP]’ and "no basis is allowed with respect to any interest paid on a loan from a qualified plan [like the TSP]." H.R. Rep. No. 99-841, at II-465 (1986) (Conf. Rep.) as reprinted in 1986 U.S.C.C.A.N. 4075, 4553; Internal Revenue Code § 72(p).

This means Congress decided that a participant paying interest on a plan loan will pay income taxes twice: once when the participant pays the interest with after-tax dollars and again when the interest is distributed from the participant’s account."

If you need a loan, as a federal employee you may be able to get a loan from another source at a better rate than is available to most Americans. Think if it as another federal employee benefit.
This benefit isn’t provided for you by Uncle Sam but, by virtue of your status as a federal employee or even a retired federal employee, you may still benefit from "peer to peer lending" or P2P.
This program is not specifically for federal employees. But, when I first heard about it at a conference by well-known financial analyst Tobin Smith (no relation), Smith was explaining a new idea epitomized by a company called Lending Club and why federal employees or military personnel are often a good credit risk.
His presentation caught my attention. It appears to capture the relatively new options offered by the internet and  helping out people who want to get a loan or those who want to have an alternative investment by loaning money. In effect, the program cuts out the role of the traditional banker.
People who want to borrow money go to the website and request a loan. Those willing to lend can loan money to others by reviewing notes submitted by potential borrowers indicating the reason for the loan and reviewing their financial information provided by the website. Before getting back home from the conference, I went to the Lending Club website, filled out the application form, and opened an account to invest a small amount of money to people requesting a loan.
Those that borrow money usually get a better rate than they will get through a bank (but at a higher interest rate than you will pay for a loan through the Thrift Savings Plan). Those that loan the money generally receive a higher interest rate than they will get through most investments such as a certificate of deposit or a corporate bond.
A person who wants to borrow money explains the purpose of the loan and provides the company with the necessary financial information. The loan rate is based on the usual factors including credit score, job stability, debt to earning ratio, etc. Each lender can review the information (the name of the borrower is anonymous) and the lender uses the Lending Club programming to decide how much to lend to a particular borrower.
The more risky the loan, the higher the interest rate that the borrower will receive. And, of course, the higher the potential for the borrower skipping loan payments.
In extolling the virtues of Lending Club, Smith mentioned the ideal borrower is often a federal employee or in the military. Many of these potential borrowers have worked for a federal agency for a few years. They have secure jobs; they are paid more than the average American; and many of them aren’t going anywhere until they retire.
In effect, federal employees who have a good credit rating are a good candidate for lower loan rates than many other Americans will be able to get.
For example, Lending Club’s rate for the best credit risks is 7.89%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less. And, if you have been using your credit card to finance purchases, you may find you are paying much higher rates.
One of the most common reasons for getting a loan is to pay off the credit card debt and pay a lower rate. Of course, that assumes you have the self-discipline to tear up or quit using the credit cards and creating a bigger financial hole than you may have already been in.
Investors who make the loans have averaged returns of over 9.5% since the program was started in 2007. There is risk involved as some people default on their loans. The average rate of return takes these defaults into account. Investing in a few riskier loans can increase the rate of return for a lender but, not surprisingly, the default rate is higher among those borrowers who are paying the higher interest rates.
After the presentation, I decided to try out the system. I did not need a loan but had a small amount of money to invest that I was willing to risk. A borrower may request an amount for a loan and hundreds of people may contribute as little as $25 toward that loan.
As a lender, I looked for federal employees with a good credit score and a few years of having worked for Uncle Sam. There were not that many federal employees listed but I did find a few.
That has generally worked out well. It isn’t perfect. One Army employee who had 10 years with the Army borrowed $20,000 for a home improvement project and had a pretty good credit rating. As an illustration of the risk you are taking should you decide to loan money, this person has has not made his loan payments and the Lending Club is going through its collection process to try and recover the money.
Managing your money is a personal matter. Generally, not borrowing money is the best option if you can avoid it. With $7.2 billion in outstanding loans through the TSP, a large number of readers have decided they need to borrow the money for a variety of reasons.
If you need to borrow money, consider your options and decide which option is the best one for you.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47