The Slow Economy's Impact on Federal Loan Programs

Federal loan programs respond immediately to a slow economy. Some programs will expand in order to create a stimulus for economic growth. Other programs may reduce in size or even be shut down, if the government does not have the funds to continue supporting the program.

Why Some Programs are Cut

It is important to remember the government is essentially a large business; it operates on a budget in accordance with its profits each year, which are usually gained through taxes. During a recession, the tax base is paying less, and the government is pinching pennies like every other business. The programs the government cuts are often internal. This means federal employees will have to take salary cuts and enjoy less perks. Some cuts are national, however, such as highway funding or loans to individual states.

Further, the government also operates on a cycle of debt. The federal government takes out loans, typically in the form of bonds, from both lending institutions and private investors. When you purchase a Treasury bill or government bond, you are essentially giving the government a loan. Lending institutions and individual investors alike are not able to provide as much cash during a slow economy.

Why Some Programs Expand

There are some ways the government is very different from the average business. One of those ways is how the rest of the country looks to the federal government to lead the way in stimulating economic growth during a recession. The government is pressured to both purchase more and to expand programs that may help individuals purchase more. Recessions are also a good time for many presidential camps to institute spending programs that may not pass in a strong economy.

For example, direct student loans were not always available. During our recent recession (2007 to 2009), the federal government expanded its assistance in paying for college directly instead of just guaranteeing loans through private institutions. This was meant to encourage a greater percentage of the workforce to continue education. Particularly, mothers who were not working and people who would usually stop school after completing a GED were encouraged to continue their education. This was implemented to encourage economic growth by adding more people to the white-collar work force.

How the Government Chooses Programs to Fund

The government juggles a delicate balance between stimulating the economy and taking on too much debt during a recession. The federal deficit grew consistently in the late 20th century, and the gap has continued to widen each year. Going too far into debt is not helpful for the government in the same way it is not helpful for a private individual.

Those programs directly aimed at stimulating the economy are the ones that receive the most funding in a recession. Small Business Administration loans, or SBA loans, are often expanded. Economists generally agree small business expansion can overcome a recession. The Federal Housing Authority will guarantee more FHA loans directed at stimulating the housing market during a recession. The housing market is another key factor in economic recovery.

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