What are the benefits and drawbacks to government-supported lending?

Possible benefits of government-supported lending include that government-backed loans carry lower interest rates and that they can make things such as homeownership and tuition available to more people. However, many fear that government-backed loans will promote lending to those who cannot afford to pay them back and will contribute to financial crises. 

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There are many benefits to government-backed lending. One is that loans issued with government backing almost always have lower interest rates than borrowers might otherwise receive. Because the government essentially guarantees the loan, borrowers may need less collateral, or a lower credit score, than private loans.

For this reason, federally-backed student loans, for example, are highly desirable for borrowers. These loans often feature very flexible repayment terms and sometimes can be written off. Many people also receive home loans backed at least in part by the federal government, which they can get with less of a down payment than conventional loans. These loans are also useful for advancing government aims and for boosting the economy through fiscal policy—promoting homeownership or college attendance by making these things more accessible to people. The government also backs loans to small businesses, farms, and veterans, filling a need for credit among these groups.

These loans, it may be argued, carry certain drawbacks as well. Some people argue that the government has no place involving itself in the housing or college loans markets. By doing so, it is claimed, it may promote lending to people who are unlikely to be able to afford to repay the loans. Conservatives in particular point to government-backed loans as a cause of the 2008 housing crisis. Some additionally claim that these loans are not fiscally responsible because if the borrowers default on them, the cost falls on the American taxpayer. For these reasons, especially during bad economic times, government-backed loans often come under fire from critics.

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