The announced pause in federal loan and grant program payments was rescinded on Wednesday, resolving the confusion
caused earlier in the week. This episode highlighted both the breadth and depth of these programs and their importance to the economic life of the American people.
Publicly available data suggest these programs play a crucial role in the mortgage and student loan markets, as well as in providing many services and income security programs at the state and local (S&L) levels.
Over the past three years,more than 20% of S&L revenues came from federal grants. Losing this support would exacerbate the expected near-term contraction in S&L budgets, and potentially force cuts to healthcare (primarily Medicaid) and education services, as well as to income security programs and infrastructure projects.
The Congressional Budget Office recently analyzed 129 different programs through which the federal government pro-vides loans to individuals and businesses, either directly or indirectly through loan guarantees. The report projected that federal assistance in this form would reach $1.9 trillion in 2025.
A little more than half of these obligations, $987 billion, was expected to be for loan guarantees in the mortgage market, provided by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Including other loan programs from Housing and Urban Development and mortgage guarantees from the Department of Veterans Affairs
brings the total financial assistance in real estate and housing loans to $1.54 trillion, over 80% of the total cost of the 129 programs. Student loans, at $90 billion, are another large category. These markets likely did not see much disruption from a two-day-long pause, but the aforementioned numbers suggest that a prolonged cessation of payments could significantly affect mortgage markets and student borrowers.
The memo issued on Monday also paused payments under federal grant programs. The bulk of these grants support a wide range of programs and services by state and local governments, including healthcare, income security, education, and infrastructure needs.
Federal grants to S&L governments
reached $1.2 trillion annually in the fourth quarter—and have been trending upward over the years. After pandemic-era spikes in these grants, the total has averaged around $1 trillion over the past three years, staying significantly above the 2019 average of $680 billion. An important objective of these grant programs is to provide insurance against both aggregate and idiosyncratic shocks that individual communities face. In that sense, it is not surprising that these grants provide an important source of revenue for S&L governments, especially in the aftermath of recessions. As shows, the share of grants in overall S&L resources is counter-cyclical, decreasing during expansions. After reaching 36% in early 2021, this ratio has come down to around 23% lately—but still somewhat above pre-pandemic lows. Aging and related healthcare costs and the lower participation rate of older workers could be at play here.
Recent research shows that state and local governments have increasingly relied on these grants for healthcare spending, particularly for the Medicaid program. Thus, a blanket pause on these grants would likely be felt immediately in healthcare services. We have argued in the past that the relatively healthy budgets for S&L governments were likely to support continued strength in employment gains through mid-2025.
But restrictions to federal grant payments could significantly change this picture. Less grant money flowing into S&L governments would force these jurisdictions to cut spending.
According to the updated FY25 data on state budgets, the anticipated normalization from significant increases in real spending after the pandemic will be less severe in FY25.