Everyone needs the help of a loan now and then. Whether you’re buying a house or just need a loan to carry you over a rough time loans are often a necessity.
In either case — or anything in between — it’s important to know what your best sources are for a loan. Remember that loans and grants are two different things: a grant is an outright award of money that never has to be paid back. A loan is a temporary provision of funds that you must pay back over time with the addition of some level of interest payments. As you might expect loans are easier to find than grants.
The more you know about loans the easier it will be to find the one that is right for you. And you will have a much better chance of avoiding getting ripped off by unnecessarily (or even illegally) high interest rates.
Based on federal agency reports, the U.S. Government made a total of $4.48 billion (yes, billion) in loans in fiscal year 2015. These loans fall into six major categories including loans to students (Education), Housing loans, Business-related loans, loans to Veterans, Agriculture, and loans related to Disaster Relief:
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The government makes many kinds of loans to different types of recipients. This article’s focus is on those loans that are made to individuals. If you want to learn more about private sector (i.e., not government) loans made to individuals - in particular unsecured personal loans - see Personal Loans. Note that in mid-2016 the federal government has come down hard on payday loans, aiming to better protect borrowers. It requires that lenders to more to judge the borrower’s ability to repay the loan. Perhaps more importantly it makes it much more difficult for lenders to “roll over” loans. That is a practice that can increase the fees charged to the borrower and the lender may even take fees directly from the borrower’s bank account. So be informed, and be aware … and avoid payday loans even with these new protections.
Update August 2017
One area of government loans is beginning to be of concern. This is the PACE program, or Property Assessed Clean Energy. The program is managed by local governments throughout the country. They make it easier for people to invest in energy efficient improvements like solar panels and insulated windows and air conditioning. Apparently in too many cases contractors have promoted the loans quite aggressively, as they receive referral fees when they steer clients to lenders. Unfortunately they do not always (if ever) take into account the creditworthiness (or lack thereof) of these clients. Lenders appear not to worry about it much either because the loans depend on the value of the property — and the debt gets added to property-tax bills as an assessment. This can cause a too often unexpected, dramatic increase in a homeowners property taxes and eventual inability to pay. In the meanwhile rating agencies say they don’t have enough history to accurately predict defaults — and the bonds that are created from the packaging of these loans appear to some to echo the situation that led up to the housing crisis. If you are considering a PACE loan — which is typically attractive because no money down is required — be sure you fully understand the terms of the loan and how it will increase your taxes!
Update April 2017 Many people have been concerned that there might be a reduction in government loans to students under the Trump administration. We don’t know what that outcome will be but we do know that it may become easier to get a private loan. The Obama plan to put more restrictions and requirements on private lenders has been scrapped per the new Education Secretary Devos. (They were going to go so far as to dictate the hours for call centers and specify how many times services could call borrowers to try to prevent defaults.) The current administration believes these rules would have increased taxpayer cost without providing meaningful protections for student borrowers or lowering defaults.
Update January 2017 Our February 2016 update warned of a reduction in the availability of student loans in the near future due to increasing rates of student default. However, incoming President Trump has indicated that he favors income based repayment programs with the slight change of capping monthly repayment amounts at 12.5% of income rather than the current 10%. We are not aware of any indication that the overall amount of loan monies available will be reduced.
News February 2016: The availability of government loans for education could be tightening in the near future. Increasing rates of default on student debt has captured considerable attention, for good reason. U.S. students can borrow up to a total of $57,500 for their college expenses – and loans are made based on need with little or no consideration of the student's ability to repay the money. Everyone applying in the same year pays the same interest rate, which is not the case with commercial loans. As of the end of the third quarter of 2015 more than 7 million borrowers had not made a payment for a year or more. The delinquency rate has almost doubled its pre-recession level, and about 25% of borrowers who have graduated are at least 90 days in arrears. The cost to taxpayers is significant and many are arguing for new ways to limit potentially risky lending. So be aware, be sure you're ready for college and majoring in something that will help you get a job – and don't delay filling out that FAFSA….
Education Loans (continued)
The Department of Education is one of the ten largest federal agencies providing grants and loans to students. The loans the department provides are of several types. Some are aimed at the parents of dependent students in college(Direct PLUS loans) while others (the Federal Perkins Loan Program) provide loans to undergraduate and graduate students who need financial help. There are also special loans that are designed to promote specific professions such as the Indian Health Service Loan Repayment Program, National Institute of Health funds for those planning careers in selected sciences and professional nurses who are practicing in underserved populations. Many loans are also available for research activities in the areas of Clinical Research, AIDS Research, Infertility and Contraception Research, and Pediatric Research.
How do you go after any of these loans? The Free Application for Federal Student Aid (FAFSA) is the key to federal student aid in almost all cases. Filing out that application (which is indeed free) should definitely be your first step in pursuing financial aid!
Housing Loans There are no fewer than 18 different types of housing loans provided by the government. The most common is the basic home mortgage that is insured by the Federal Housing Authority (FHA). The FHA does not loan money directly to the consumer. Rather they have approved specific lenders to whom they provide insurance programs. These programs make mortgages less risky for banks and more accessible for borrowers, a win-win all around when reasonable requirements are met.
Other housing loans and insurance programs are provided for specific groups and purposes. These include housing and repair loans (and grants!) for seniors living in rural areas, loan insurance for property improvements and for Manufactured Homes, and Indian Home Loan Guarantee Program, Home-related Disaster Loans and Mortgage Insurance, and a PowerSaver Home Energy Retrofit Loan Program. The Department of Agriculture also has a Farm Labor Housing Loan and Grant offering so that people can build or repair housing for workers who labor on farms. (Farms in this case can include “aquaculture” - typically farms for fish and oysters. Learn more about many of these programs in Home Grants.
Business Loans The U.S. Government goes to great lengths to make capital available to businesses - particularly small businesses - through various guarantee programs and incentives. Many of these are clearly explained (and evaluated) in our article about Grants for Business, which covers both grants and loans. The U.S. Small Business Administration (SBA) is also a great source of help and, indirectly, financing for small business. Learn a lot about SBA loans, services and programs for small business!
There are also a couple of less well known business loans available from the government. For example, the Department of Transportation (DOT) Office of Small and Disadvantaged Businesses Utilization (OSDBU) Financial Assistance Division has a Short-Term Lending Program (known as STLP) that provides capital to small businesses competing for government contracts related to transportation. Loans are provided at attractive interest rates for projects being contracted by DOT. Learn more about this program on the DOT web site - just search for “Short Term Lending Program.” You can also get technical support filling out the application. Applicants must be established businesses (not start-ups) that are certified as a Disadvantaged Business Enterprise according to DOT rules and it must not be in arrears on its taxes.
Another good example is the Certified Development Company (CDC) (504) Loan Program. This is a long term lending program that helps businesses with developments that improve the economy of specific communities. You can find more information and application details on the SBA website.
Agriculture Loans Agriculture Loans are provided by the Department of Agriculture, mainly through the Farm Services Agency (FSA). Types of financing available include Emergency Farm Loans, Operating Loans, Ownership Loans, Farm Storage Facility Loans, Farm Labor Housing Loans and Grants, and even a financing program for Fisheries (FFP or Fisheries Finance Program). Learn more about these in Grants for Farms as well as in the section above regarding housing loans. Grants for Farms also details interesting loans made to encourage youth who are interested in farming and ranching. Definitely worth checking out for young people interested in farming/ranching including its business aspects.
Disaster Relief Loans The Small Business Administration typically handles disaster relief loans for homeowners as well as businesses in the event of a disaster. Farms are handled by the USDA Farm Services Agency. They also provide the Military Reservist Economic Injury Disaster Loan program (MREIDL - really) to protect a small business from being harmed economically when an employee is called up for active duty as a military reservist.
Veterans There are extensive benefits and loans available to Veterans in the U.S. These include loans for purchasing homes including the VA-Guaranteed Home Loan Program. The Interest Rate Reduction Refinance Loan (IRRRL) allows eligible vets to lower the interest rates and payments on existing VA loans. Check out Grants for Veterans as well as the VA for more programs and related information.
Other Also of interest should be the Small Business Administration. No they don’t make loans directly to businesses, but they do make it easier for lenders to do so. In fact, they have recently even started a Microloan Program. This program provides non-profit intermediaries with the funds to offer loans to small businesses and to some nonprofit childcare centers. Typically microloan borrowers take out loans of about $13000.
The government can also help you find a loan based on the results of a questionnaire. The questionnaire is long and asks a lot of detailed questions about about pretty much every aspect of your personal life. If you are willing to fill it out it will give you a list of government loans for which you might qualify. Just go to govloans.gov, click the arrow by “Loans” at the top, and click “Loan Finder.”