Nonpay Status: Handling TSP Loans While in Nonpay Status

The Internal Revenue Service allows you to suspend your loan payments:

• If you are in approved nonpay status, you may suspend your loan payments for up to one year.
• If you are a civilian entering nonpay status to perform military service, you may suspend your loan payments until you return to pay status. However, you cannot repay your civilian loan(s) from uniformed services pay.

Make sure your agency or service notifies the TSP when you enter nonpay status and when you return to pay status, so that you do not default on your loan.

Your agency or service should use Form TSP-41 to notify the TSP of your nonpay status. However, there are other forms of acceptable documentation.

Notifying the TSP of your nonpay status is a very important step, because if the TSP does not suspend your payments when you enter nonpay status, or your agency does not resume deducting your loan payments from your pay when you return to pay status, you will default on your loan.

There are important consequences if you default on your loan.

• The TSP will declare a taxable distribution of your loan and you will be subject to tax on the taxable portion of the outstanding loan balance (including any accrued interest).
• Any Roth earnings included in the distribution will be subject to tax, even if your earnings were already qualified.
• You will lose the opportunity to repay the loan and you will have to pay taxes on the unpaid balance of your loan for that tax year.
• You may be subject to a 10% early withdrawal penalty tax.
• For 12 months following the date of the taxable distribution, you will not be eligible to apply for another loan.

Interest on your loans will continue to accrue while you are in nonpay status. For this reason, many TSP participants continue to make loan payments while in nonpay status.

If your loan suspension period ends and you are still in nonpay status, you must make loan payments, or a taxable distribution will be declared (see Defaulting on Your Loan above).

To make a loan payment while in nonpay status, send a personal check or money order to the TSP, along with a TSP Loan Payment Coupon.