The TSP Loan Cost Every Fed Misses

You’re on the TSP website, and the loan option looks almost… responsible.

No lender. No credit check. A payment schedule that feels neat and controlled.

That “interest back to your account” line is what makes people relax.

But the price tag just doesn’t show up as a fee.

A TSP loan is basically a trade:

• You swap market exposure for a fixed repayment plan.

• The money you borrow is no longer invested while it’s out.

So even if you repay every penny on time, you may still end up behind because you can’t repay the returns you never captured.

The 4 ways a TSP loan quietly costs more than it feels

1) “Opportunity cost” as the main event

The loan interest might look reasonable.

But the problem is that your loan isn’t competing with a credit card rate — it’s competing with what your portfolio might have earned.

When markets are strong, the loan can function like an unintentional “return cap” on the borrowed chunk of your balance.

You feel disciplined because you’re making payments… but your invested money would’ve been compounding without you lifting a finger.

2) The rebound penalty

This is the one that stings emotionally.

If you borrow after a market drop, you’re pulling money out when prices are already down.

Then if the market rebounds while your loan is outstanding, you miss part of the snapback.

Your repayments buy back in gradually. But often at higher prices than where you took the loan.

That’s the double whammy.

3) Your contribution rate becomes collateral (and match can leak)

Loan payments come from your paycheck. So the loan can pressure you into reducing contributions “just for a while.”

That “while” matters.

If a loan causes you to drop contributions below the level that captures the full agency match, you end up turning down free compensation.

In fact, a lot of TSP loan math looks fine until you add one line:

If yes, the loan got meaningfully more expensive.

4) Separation risk turns a loan into a deadline

A TSP loan is easiest when your job situation is stable.

If you separate from federal service with a loan outstanding, the timeline tightens fast.

And if you can’t deal with it in time, it can become a taxable event (and possibly a penalty event, depending on age and specifics).

This is why loans are often “fine”… until they’re suddenly not.

Should you even consider it?

A TSP loan is usually in the least-bad category only when it checks most of these boxes:

• You’re replacing truly toxic debt or preventing a financial emergency from getting worse

• The amount is modest and the payoff window is short

• You can keep contributions high enough to protect the match

• You have low separation risk (or a clear backup plan if you leave)

• You’re not borrowing because you’re uncomfortable with market volatility

But if you plan to borrow anyway, here are some guardrails to consider:

1. Borrow the minimum that solves the problem (not the maximum you qualify for)

2. Shortest term you can realistically handle

3. Protect the match like it’s untouchable

4. Set an automatic “emergency fund rebuild” contribution so the loan doesn’t become a habit

5. Avoid borrowing right after sharp drops (that’s when rebound risk is highest)

6. Write down your separation plan (what happens to this loan if you change agencies, retire earlier, etc.)

7. Schedule a payoff milestone (example: “half paid by X date”), not just an end date

The bottom line

The loan isn’t “free” because the interest goes back to you.

The real cost shows up in interrupted compounding, forced contribution cuts, and being out of the market at the wrong time.

If you can clear those three hurdles, it might be a reasonable tool.

But if you can’t…

It’s often a quiet drag on the financial freedom you’re trying to build.

Best,
—FWR