Advantages & Disadvantages of a Government Loan
Many people think that government loans should be avoided because of all the bureaucracy involved when working with the government on any level, but there are some distinct advantages that balance the disadvantages. One thing is for sure, if you do not intend to pay back a government loan, you should not accept one. There are a number of serious penalties and actions imposed on people who choose to ignore or default on a government debt.
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Advantage #1 Lower Interest Rates
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Government loans tend to have lower interest rates. In the case of a government student loan, the interest rates are very attractive compared to conventional loans. Many students are able to get Federal Stafford loans and consolidation loans at rates as low as six percent, whereas an educational loan with a regular bank can cost more than eight percent annually depending on the student's credit history. Unlike regular loans, which are usually based on the prime rate or LIBOR, Federal loans are generally calculated using 91-day Treasury bills, which tend to be lower than the other common indices. Back in 2002, rates on federal student loans dropped substantially to an amazing 4.06% and borrowers were allowed to locked that rate in going forward. Later on the College Cost Reduction and Access Act of 2007 cut interest rates for student borrowers as well. So the government seems to make more efforts to help the public with affordable loans.
Advantage #2 Fast Approvals
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While the application process is sometimes very involved, the government is usually more quick with their decisions than standard lenders. For example, the Small Business Association (SBA) has made a commitment to approve SBA loans within 3-5 business days so that business owners can go forward with their business plans, approved or not. Federal student loans applications are also commonly approved quickly and the funds released electronically to allow students to continue with school.
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Disadvantage #1 Can't Write off Debt
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No matter what happens in your life, you generally cannot write off a government debt. You are responsible for paying back this debt before all others. Even in the case of a bankruptcy, government student loans, government backed SBA loans, and other debts are still owed. Keep in mind that when you take out a government loan, you owe the people of the United States, so you will have to pay this money back one way or another.
Disadvantage #2 More Red Tape
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Government agencies are held to a standard by the public and lawmakers, so they are usually more thorough with their loan application processes. When applying for a government loan, you will probably be met with more steps, more paperwork, and tighter requirements in order to be approved. The government has to be 100% assured that you are eligible for the loan before releasing any funds.
Considerations
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Prior to 1833, the United States threw people in jail for defaulting on government debts. Now, while it is still possible to be imprisoned for certain government debts, like child support and alimony, generally people are no longer in danger of facing debtor's prison. Instead, the government will take every possible action to retrieve the money owed, including wage garnishments, liens against property, and the seizing of assets.
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