What Is a Government Loan?
The U.S. government offers loan programs through different departments to support the needs of individuals, businesses, and communities. These loans provide capital for those who may not qualify for a loan from a private lender. Government loan programs can help:
- Improve the overall national economy and quality of life of its citizens
- Encourage innovation and entrepreneurship
- Provide protection against—and relief from—disasters
- Improve on the country’s human capital
- Reward veterans and their dependents for past contributions and help with present needs
Individuals and small businesses with little or no seed capital or collateral may find the terms for a private loan unaffordable. Low-cost government loans attempt to bridge this capital gap and enable long-term benefits for the recipients and the nation.
- The government doesn't always lend money directly. In some cases, it guarantees loans made by banks and finance companies.
- The most common government loans are student loans, housing loans, and business loans.
- Other loans include those for veterans and disaster relief.
- The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided special funding for small businesses impacted by COVID-19 in 2020.
How Government Loans Work
Loans provide benefits to both borrowers and to the U.S government as a lender. They make capital available to borrowers who need it, and the government's initial capital is returned with interest.
Government loans may or may not be funded by the government, but all government loans are secured—or guaranteed—by the government. When the government funds a loan, it provides the loan capital. This money originates from taxpayers.
When the government only secures a loan, it effectively cosigns with the borrower on funds provided by designated lenders like private banks or government-sponsored enterprises (GSEs). This means if the end-borrower defaults on loan repayment, the government has to repay the lender.
Federal vs. Private Loans
The obvious difference between federal and private loans is that federal loans are offered by the U.S. government and private loans are offered by private lenders. The two types of loans have different benefits, interest rates, and repayment options.
In general, government loans tend to have lower interest rates, and they may have other perks such as no credit history checks, deferred payment options, flexible income-based repayment plans, no pre-payment penalties, and partial loan forgiveness if the borrower chooses public service as a career path. For example, student loans in the U.S. may be forgiven after a period of years if the graduate works in the public or nonprofit sector, and certain conditions are met.
Because government loans often have more attractive terms than private loans, demand for them can be high and selection criteria can be tough. The application process can also be time-consuming.
What are Government Loans?
Subsidized and Unsubsidized Loans
Subsidized loans are loans for which a third party, or someone other than the borrower, pays the interest on a loan for a set period of time. With a subsidized federal student loan, for example, the bank or the government (for Federal Direct Subsidized Loans), pays the interest while the borrower is in school, during a grace period following graduation, and if the borrower needs a loan deferment.
Unsubsidized loans, on the other hand, require the borrower to pay all interest costs, right from day one. In the case of federal student loans, borrowers do not need to demonstrate financial need for an unsubsidized loan, and in many cases may be able to borrow more.
Types of Government Loans in the U.S.
The U.S. government offers loans in the following areas. Other countries may have variants, but these categories generally apply broadly across the world.
Housing and Urban Development Loans
The largest part of the government loan pie is for financing home loans. This category has the largest number of loan programs, including loans for buying homes, making homes energy efficient, interest rate reduction, and paying for home repair and improvements. Common loan programs include:
These loans are considered to be the safest from the point of view of the lender (and sponsor), as they are secured by physical property as collateral in case of default.
Education loans are intended to fund undergraduate and graduate college education or specific research-related courses. Research in some areas of healthcare, such as AIDS, contraception, infertility, nursing, and pediatrics, have dedicated loan programs. Common education loan programs include:
The government can also fund the education of aspiring students for unique research or courses available only at foreign locations. Additional conditions, like working in public service upon graduation, may be attached to loans for foreign programs.
Education loans are considered to be the riskiest category for lenders and sponsors, as such loans are heavily dependent on individuals and may not be backed by physical collateral (such as property, in the case of home loans).
Business and Industrial Loans
No country or community can flourish with a stagnant marketplace. Innovation, entrepreneurship, employment, and healthy competition are important to the overall development of a nation's economy. The loan programs offered in the business and industrial loan category aim to encourage these aspects of development. Business loans are available for small, mid-sized, and large businesses and industries for various periods of time.
On March 27, 2020, President Trump signed into law a $2 trillion coronavirus emergency stimulus package called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. As part of the new legislation, the Small Business Administration (SBA) established the Paycheck Protection Program, a $350 billion loan program. It's available to businesses with 500 or fewer employees to help cover healthcare costs, payroll, rent, utilities, and other costs. The SBA also expanded some of its existing programs, including the Economic Injury Disaster Loan Program. The funding was later extended when President Biden signed the American Rescue Plan Act into law in March of 2021.
Funding can be used to buy land, facilities, equipment, machinery, and repairs for any business-specific needs. Other unique variants in these government loan programs include offering management assistance to qualifying small start-ups with high growth potential, among others.
Agriculture, Rural, and Farm Service Loans
These loans provide funding to encourage farming, which can lead to food security and rural development. Several loan programs are available for agriculture and farm service. Capital allows the purchase of livestock, feed, farm machinery, equipment, and even farmland within the eligibility criteria.
Loans are also available for constructing on-farm storage, cold-storage, and processing and handling facilities for selected commodities. Other available loans cover fisheries, financing for aquaculture, mariculture, and commercial fishing industries. The dedicated Rural Housing Farm Labor Housing Loans and Grants program offers capital for the development and maintenance of housing for domestic farm laborers.
Loans for Veterans
The U.S. federal government provides benefits to eligible service members, including veterans, reservists, those in the National Guard, and some surviving spouses. The loans can be used to obtain, retain, and adapt a home, and to refinance loans. Financial benefits may include other expenses as offered by various programs.
Disaster Relief Loans
Disaster relief loans offer coverage for damages arising from natural and man-made disasters for farming, housing, and commercial businesses. Businesses may also be covered for the absence of key employees who serve in the military and have been called for service.
If a business, farm, house, or other property is hit by a disaster and the location is declared a disaster area, such disaster relief loans come to the rescue of owners and workers, who can obtain relief to re-establish themselves as well as their businesses and properties destroyed by the calamity.
As part of the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act, the SBA expanded funding for its Economic Injury Disaster Loan program for businesses affected by the COVID-19 pandemic.