An Introduction to Government Loans

The government offers loan programs through different departments that support individuals, communities and businesses according to their unique needs. These loans provide capital for those that might not qualify for a loan on the open market. Government loan programs aim for the following long-term benefits at the social and economic levels to:

• 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 conditions for a market rate loan unaffordable. Low-cost government loans attempt to bridge this capital gap, enabling long-term benefits for the recipients and the nation.

Government loans are usually offered at discounted interest rates compared to those offered by private lenders. Private loans from commercial lenders come have comparatively higher interest rates and sometimes require guarantees through cosigners. They also may not offer all the other benefits of government loans listed above.

Other benefits of government loans may include fixed and subsidized interest rates, no credit history checks, allowing deferred payment, flexible income-based repayment plans, no prepayment penalties, and partial loan forgiveness if the borrower chooses public service. 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 market-rate loans, demand for them can be high and selection criteria can be tough. The application process can also be time-consuming.

Loans provide benefits to both borrowers and the 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.

Subsidized loans are loans for which a third party, or someone other than the end borrower, pays the interest on a loan for a finite period of time depending on the loan type. Such parties can be the government, recognized institutes or charity organizations who pay the interest on behalf of the borrower to the lender during a set period. For a loan subsidized by the government, it is usually the national or state government (or its designated agencies or institutes) that offers the subsidy. Unsubsidized loans require the borrower to pay all interest costs, right from day one of the loan amount being disbursed. 

Once a borrower has been deemed eligible, the benefits of subsidized rates, easy repayment options, deferred payments and other benefits may make government loans attractive to many people.

The U.S. government offers loans in the following areas. Other countries may have slight variants, but these categories generally apply broadly across the world.

Agriculture, rural and farm service loans: Aimed at offering financial provisions 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, 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 development and maintenance of housing for domestic farm laborers.

Business and industrial loans: No country or community can flourish with a stagnant marketplace. Innovation, entrepreneurship, employment and healthy competitiveness 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.

Capital can be used toward the purchase of land, facilities, equipment, machinery and repair 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.

Educational loans: Educational loans are intended to fund undergraduate and graduate college education or specific research-related courses. Research in some areas of health care, such as AIDS, contraception, infertility, nursing, and pediatrics, have dedicated loan programs. The government can also fund the foreign 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.

Educational 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 a physical collateral (like property in case of home loans).

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 making homes energy efficient, interest rate reduction, home repair and improvements, and loans for specific communities (first-time home buyers, Native Americans, veterans, etc.). These loans are considered to be the safest from the point of view of lender (and sponsor), as they are secured by physical property as collateral in case of default.

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 to obtain, retain and adapt a home and to refinance their 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.