Government loans: What are my borrowing options?

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In a Nutshell

Government loans are available for a wide range of situations. If you’re buying a home, financing an education, starting a business or looking for help after a disaster, a government loan may be an option.
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The federal government doesn’t just take your tax money throughout the year and then send you a refund (or expect you to pay) the following spring. Sometimes when you need money, Uncle Sam can also lend you some, in the form of a government loan.

Different types of government loans are available, but they all share a similar purpose: improving the overall economy by investing in people, communities and businesses.

Whether you want to start a business, buy a home or fund an education, the U.S. government offers the opportunity to apply for loans, typically designed for a specific purpose. These loans are designed to support local communities, encourage entrepreneurship, help veterans and active-duty military families, and provide access to education.

Let’s look at the types of loans available from the U.S. government, how they work and who might qualify for one.

What are government loans?

Loans that are either directly funded by the federal government, or are underwritten by private lenders with the backing of the U.S. government, can be referred to as a government loan. Borrowers must repay government loans (they’re not grants), usually with interest.

A government grant is meant to fund ideas and projects to provide public services and stimulate the economy, and doesn’t need to be repaid. But the federal government doesn’t just give “free money” to individuals for personal purposes. Instead, government grants typically go to state or local governments, universities, researchers, members of law enforcement, organizations and institutions with initiatives that will benefit the public and the economy.

Direct vs. guaranteed government loans

Government loans are either direct loans or guaranteed loans.

With a direct loan, you’re borrowing money directly from a government agency. All loan payments will be made to pay back the government.

With a guaranteed loan, you’re borrowing money from a private government-approved lender. The government makes a guarantee to the lender that it will cover a certain amount of losses if you don’t repay the loan. This guarantee helps reduce the risk for the lender so that it’s able to extend credit to borrowers who might not qualify for a loan from a private lender.

Private vs. government loans

Private loans, made by a private lender like a bank or credit union, are different than government loan programs. It may be more difficult for certain borrowers to qualify for loans through private lenders.

For example, a private mortgage lender may require good credit scores and a large down payment. But you might be able to qualify for an FHA mortgage with a lower down payment and flexible credit qualification.

Benefits of government loans

If you qualify for a government loan, a number of potential benefits can make it an attractive borrowing choice.

Subsidized loans

Some government loans are subsidized, meaning the government agency will pay the interest on the loan for a certain period of time. Direct subsidized loans for education are an example of this type of loan.

Loan accessibility

Both direct and guaranteed government loans serve people who might not be able to qualify for loans from private lenders for various reasons.

For example, an FHA mortgage loan can allow borrowers to put as little as 3.5% down and qualify with lower credit scores than they might need for a conventional loan. The U.S. Department of Agriculture, or USDA, also provides home loans with no required down payment to some low- and very-low-income applicants living in rural areas.

Flexible repayment options

Some government loans come with repayment plans that make it easier to pay. For example, some student loans can be repaid on an income-driven repayment plan. These repayment plans calculate your monthly payment using your income and family size to come up with a payment that’s affordable.

Government loans may also offer longer repayment terms to make loan payments more affordable. For example, a home loan from the USDA can come with a repayment period of up to 33 years, or 38 years for low-income applicants who can’t afford a 33-year term. Keep in mind, though, that while a longer loan term can mean smaller monthly payments, it also likely means you’ll pay more in interest over the life of the loan.

Not everyone will qualify for a government loan. Each type of government loan has certain criteria that borrowers must meet in order to qualify. These qualifications may include income, business use (for business loans) and location, among other criteria.

Types of government loans

Different types of government loans are available for varying purposes.

Agriculture loans

If you’re looking to start or strengthen an agricultural business, a number of government loans may be available to help.

The USDA’s Farm Service Agency, or FSA, provides both direct and guaranteed agriculture loans to support family farms and ranches and to promote a strong agricultural economy. FSA loans are intended for farmers who don’t qualify for a private loan. The program aims to help farmers qualify for commercial credit in the future by providing temporary supervised credit.

Fishermen and fisheries may be able to secure long-term financing through the U.S. Department of Commerce’s Fisheries Finance Program. The program makes direct loans to help finance the construction or reconstruction of fishing boats, fisheries and aquacultural facilities.

Business loans

To help promote economic and community development, a number of business loans are available to help fund businesses of all sizes. The U.S. Small Business Administration, or SBA, can guarantee loans for certain businesses that don’t qualify for financing from other sources. It also funds very small microloans to new or growing small businesses to help provide the capital that they need.

Rural businesses might qualify for a guaranteed business loan through the USDA. This guaranteed loan program was created to help promote economic growth in rural communities.

Disaster-relief loans

Recovering from a disaster can be time consuming and expensive. Disaster-relief loans provide money to help people and businesses recover from a federally declared disaster.

Qualified businesses and most nonprofit organizations can apply for loans of up to $2 million to repair or replace real estate, machinery, equipment and other business property. The loans are meant to help cover losses not covered by insurance, though eligibility requirements apply.

Even if you don’t own a business, if you’re in a declared disaster area you may be eligible for a disaster loan through the Small Business Administration. These loans cover physical damage to businesses and homes as well as financial harm to a business or nonprofit organization. Both renters and homeowners can apply for a disaster-relief loan.

There are also loans available to support small businesses with employees who are in the military reserves and who are called to active military duty in a declared disaster area. If they meet certain qualifications, businesses can use these loans to continue to pay operating expenses until an employee returns from military duty.

Housing and home-improvement loans

The government sponsors a large number of loan programs to help support housing and development, with programs available for specific groups, like first-time homebuyers, Native Americans and veterans.

Loan programs are also available for …

  • Rehabilitating homes
  • Adding energy-efficient features
  • Promoting home ownership in rural communities
  • Buying a home when you’re a first-time buyer, have subprime credit, or little or no down payment

Education loans

Education loans are available to help fund undergraduate and graduate education.

These loans, which generally have lower interest rates than private student loans, may be available to qualifying students and parent borrowers to help cover education costs.

Additionally, the federal government sponsors loan-repayment programs for people who agree to work on certain types of medical research after graduation, certain graduates who commit to work a minimum of two years for the National Institutes of Health on AIDS research, clinical research and pediatric research, as well as those working in infertility and contraception research. Through these programs, the government repays a portion of the participant’s education debt for each qualifying year.

Nurses and other health professionals who work in specific communities may also be eligible for loan-repayment programs.

Veterans Affairs loans

A number of government loans may be available for some veterans, service members, reservists and National Guard members. Additionally, surviving spouses may also qualify for some loans. VA loans may include home loans with lower interest rates and lesser down payments requirements, home-refinancing loans and loans against certain life insurance policies.

Bottom line

The federal government offers more than 50 different loan programs aimed at helping people access the credit they need to fund businesses, farms and other agricultural endeavors, education, home purchases and more. These public programs have a common purpose — to stimulate and grow the U.S. economy by supporting the financial goals of people who might not be able to get the credit they need through private-sector sources or who can get better terms than they’d find elsewhere.

About the author: Erica Gellerman is a personal finance writer with an MBA in marketing and strategy from Duke University. She’s also the founder of The Worth Project: a weekly money newsletter you actually want to read. Her work has b… Read more.