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Paying yourself interest is just moving money from on pocket to another. You'd need the cost basis of purchases of all loan repayments/additional investments over the course of the tsp loan repayment and compare to the redemption prices at the time of the loan and then adjust for the interest saved on the student loan
I agree. I removed the self paid interest from the equation. Now, using the above calculators I’m getting the following.
Student loan of $40,000 paid over 7 years at 5.5% = $8,283.38 in interest paid to lender.
TSP balance of $40,000 could have earned 7% per year over 5 years as the loan is slowly paid back over those 5 years = $8,372.26
So according to these tools the break even is just under a 7% annual return on the TSP L2050. If I take it up to 8% they would lose out on a $9,787 return so would be in the red ~$1,400 as they missed out on a better return than the saving from the student loan. At 6% they would only have earned $7,014 on their TSP over the five years so would be better off having taken the loan.
Does this sound right? Remember that he will be slowly paying the money back into his TSP account over the 5 years. So you can’t simply use compound interest.
It looks like, so far, this has paid off. The market is right back to where it was when he took out his loan and he saved a years worth of 5.5 interest on his $40,000 in student loans. That and he said his credit score popped due to less debt. TSP loans are not reported on your credit report as it is technically a loan to yourself.
I took out a couple TSP loans over the course of my career and this is what I'll say about them: At the time I really felt like I needed those loans for whatever reasons. I look back on them now that I'm closer to retirement and think about all the compounding I lost out on and what my balance "could" have been. Of course that's an exercise in futility as it's water under the bridge. BUT, I do tell new Feds to try their best not to touch their TSP's if they can at all figure out another way. Sometimes life happens and you have no choice though so I get it. My balance is still quite nice, and I will still retire on time with a nice sum...but it could have been quite a bit bigger.
40k taken out of his 401k at 8% for 5 years (length of payback for 401k loan) is $58k. So you lose 18k in gains during the loan term. That 18k over the next 25 years after grows to over 123k lost in gains you can never get back. The interest on his student loans is not that high.
There are 401k loan calculators online that track what you lose with a loan. It's usually always worse than paying back a 10% loan.
Also, student loan interest is tax deductible if you meet certain income limits.
He makes too much money to write off student loan interest. The write off begins to faze out at an income of $60,000 and is gone at $80,000. He’s in the low six figures.
The s&p 500 is up over 30% including div reinvestment since the start of this thread nearly 14k in gains if you could swing the cashflow to keep up with the payments
Sounds like a great idea to me. Lower interest rate, and he's paying himself the interest, instead of paying the bank. Honestly, if he could pay himself a higher interest rate, it would be even better.
I definitely agree with getting out of the market. We are SO due for a major correction.
And I was SO ahead of my time! I got out of the market at about 26.5K on the DJIA, for personal reasons, which now seem to have stabilized, and I wish I had not. Hubby and I are watching the response to coronavirus and considering jumping back in, trying to time it.
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