Cutting waste in federal spending is big news lately. The new administration’s focus on efficiency and cost control is impacting every program across the government, including federal lending programs for energy dominance, infrastructure, and supply chain near-shoring. However, federal loan programs that serve these missions have considerable flexibility to modify their loan terms and achieve real cost savings without having to shut their programs down entirely.
Typically, when a federal agency reduces spending, top-line program sizes must be reduced. For example, if a $100 million grant program must save $20 million, the program must cut $20 million of grants—pretty simple.
But in the world of federal lending, loans are more nimble. Federal loan programs can tighten the terms and conditions of the loans to reduce costs without reducing the volume of loans. To cut spending on loans (otherwise known as credit subsidy), policymakers have a number of options, including collecting more borrower fees, raising borrowers’ interest rates, reducing the maturity of the loan or requiring higher underwriting standards or more collateral. But none of these options requires an actual reduction in the volume of the loans.
These options give federal lending programs a lot of “tools” in their toolbox to cut costs to the taxpayer without necessarily gutting loan volumes, making lending policy uniquely resilient to tough budget times. Additionally, this increased cost-share by borrowers increases private investment and attracts greater amounts of private capital. This may further nudge the program toward projects with greater or clearer economic viability in the private markets. As a result, these programs may be less generous but more resilient.
However, to ensure that these changes to the loan terms and conditions will result in a lower cost as scored by the federal budgeting offices, federal lenders must employ advanced credit subsidy modeling that directly demonstrates this cause and effect to both the Office of Management and Budget and the balance sheet auditors. Without this proof, validating the reduced cost to the taxpayer may be impossible or unreliable. For this reason, federal lending requires sophisticated cost estimation afforded by state-of-the-art federal credit modeling now more than ever.
Photo by Jakub Żerdzicki on Unsplash
