Get the Facts Before You Borrow

(April 28, 2009) – While borrowing from your NYSTRS contributions may seem convenient and appealing, we urge you to do the math before applying for a loan. You may find it a costly proposition.

For example, the taxes on this type of loan may be quite high – particularly if you have an outstanding loan balance and you take a new combined loan. An IRS regulation requires the amount of a combined loan to be added to the remaining balance of the original loan to test for taxable distributions. In many cases, you may end up paying more in taxes than you actually borrow.

Understand, too, that the law mandates we charge 7% interest for loans to Tier 3 and 4 members, and 5% for loans to Tier 1 and 2 members. You may be able to get much more favorable rates in the marketplace.

Finally, consider the consequences of having to repay the entire loan amount prior to retirement or risk a reduced retirement benefit. If you are a Tier 3 or 4 member and have an outstanding loan at retirement, the amount you owe will be amortized over your anticipated life expectancy. As a result, your monthly benefit payments will be reduced throughout retirement. Also, if a beneficiary is entitled to a payment after your death, those payments will be lower as well.

If you are a Tier 1 or 2 member with an Annuity Savings Fund (ASF), the return from that fund will be reduced if you default on a loan. In this instance, the loan amount in default is deducted from the ASF at the time of default, meaning that money will no longer be available to you at retirement unless you choose to repay the defaulted loan prior to your retirement date.

In addition, a portion of unpaid loan balances may be subject to federal taxes. An additional 10% IRS penalty may apply if you are younger than 59 ½ and are still an active member at the time of default.

If you are nearing retirement and have an outstanding loan, contact NYSTRS at (800) 348-7298, Ext. 6080 to discuss your situation. Additional loan considerations, including eligibility requirements and terms of repayment, are covered in our publication Borrowing From Your NYSTRS Contributions.

If you do wish to borrow from your contributions and you are a MyNYSTRS account holder, you can now obtain a loan estimate online. Performing calculations online allows you to try numerous estimates. You may minimize possible tax consequences by reducing the amount of your request, increasing payment amounts and/or condensing the payment schedule. You can also apply for a loan electronically through this members-only link.

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