How Modernizing Federal Loan Programs Can Expand Lending, Lower Costs, and Drive Economic Growth

Smarter underwriting, better servicing, and modern technology can unlock billions in additional lending without increasing federal spending.

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Introduction

The federal government now manages more than $5 trillion in outstanding credit: student loans, small business loans, farm loans, mortgages, disaster recovery, and infrastructure financing. That portfolio is larger than the assets of JPMorgan Chase, the largest U.S. bank, yet managed on systems that have not kept pace with its growing scale or complexity.

Federal credit programs exist for a reason: to extend capital to borrowers that private markets underserve — farmers in rural communities, first-generation homebuyers, small businesses without deep collateral, students at community colleges. When these programs work well, they are among the most direct tools the government has for supporting economic growth and broadening opportunity.

The question is whether they can work better and whether the budget process is structured to reward agencies that make them do so. Right now, the answer to the second question is largely no. But it doesn’t have to be.

Better Underwriting and Servicing Can Lower Costs and Expand Lending

Government loan programs typically convey some level of benefit (a subsidy) to borrowers or lenders to ensure loans get made to meet explicit public policy goals. The cost of that subsidy is measured by estimating the net present value of what the government expects to outlay beyond what it will be repaid or otherwise recovered. That cost is recorded upfront in the budget and funded through annual appropriations for most programs.

Improved underwriting methods — like better risk stratification, more predictive borrower assessment, more accurate pricing of credit risk, and better deal structuring — reduce that cost by lowering expected default rates. Improved servicing infrastructure does the same on the back end: early intervention with at-risk borrowers, faster resolution of delinquencies, and more effective collections all reduce actual losses against which subsidies are calculated.

The arithmetic is straightforward. A program that costs 5 cents on the dollar in subsidy can support $20 of lending per appropriated dollar. Drive that subsidy cost to 3 cents through better underwriting and servicing and the same dollar supports $33 in lending. That is not a theoretical gain. It is a meaningful increase in lending capacity — capital that can reach farms, small businesses, and households that may otherwise face constrained access to credit. To the extent that this financing supports productive activity that would not otherwise occur, it drives additional economic output.

Across the $5 trillion portfolio, even a modest improvement in program performance translates into tens of billions of dollars in expanded lending capacity or reduced taxpayer exposure, depending on how policymakers choose to deploy the savings. The technology to achieve those improvements is now commercially available, deployable in months rather than years, and cheap relative to what it protects.

USDA Is Already Moving: A Model for What’s Possible

The U.S. Department of Agriculture administers one of the government’s most consequential credit portfolios. Through the Farm Service Agency and the Rural Development mission area, USDA provides direct loans and loan guarantees to farmers, rural homeowners, small businesses, and community infrastructure projects in some of the most economically vulnerable parts of the country. Those programs are not marginal: they are often the only source of capital available in the communities they serve.

USDA is now investing in end-to-end modernization of the systems that support these programs: loan origination, underwriting, servicing, and portfolio management. That investment — spanning data infrastructure, process automation, and modern risk assessment and pricing — is designed to do what piecemeal upgrades have not: create a coherent, modern lending enterprise capable of making better credit decisions, identifying risk earlier, and intervening more effectively when borrowers struggle.

If USDA’s modernization delivers on its potential by reducing costs through improved underwriting accuracy and servicing performance, the fiscal dividend could be significant. This is the chain that connects technology investment directly to economic prosperity: better systems → lower subsidy costs → expanded lending authority → more capital in underserved communities → stronger rural economies.

The Budget Structure That Works Against This—and How to Fix It

The USDA example makes the opportunity concrete. But realizing it at scale requires confronting a structural problem embedded in the current budgetary treatment of program investments.

Under the Federal Credit Reform Act (FCRA) of 1990, when loans perform worse than projected, a permanent indefinite appropriation automatically covers the difference—no supplemental request, no congressional vote. The backstop is defensible: financing accounts cannot be allowed to become insolvent, and persistent overruns do eventually force higher subsidy rates on future loans. But the mechanism severs the connection between operational investment and fiscal payoff. Investments in modern underwriting and servicing carry immediate costs on an agency’s discretionary budget, but the returns — lower defaults and reduced future subsidy rates — accrue invisibly and over years. USDA is moving forward despite this, driven by institutional commitment rather than any budget signal. The question is whether the process can be restructured so that commitment is the norm, not the exception.

Fortunately, the moment is right. AI-powered underwriting and pricing coupled with fraud detection tools that once required lengthy procurements can now be deployed commercially at a fraction of former costs. Modernizing loan systems is one of the few investments that simultaneously reduces government expenditure, improves program performance, and expands credit access — a fiscal argument with appeal across the political spectrum.

Three interventions deserve serious attention:

• Fiscal assessments of budgetary savings resulting from better underwriting and servicing. OMB could require agencies to estimate the subsidy-cost implications of proposed underwriting and servicing investments as part of annual budget submissions, making the connection between operational choices and long-run fiscal outcomes visible and defensible.
• Incentives for investment in loss-mitigation infrastructure. Budgetary frameworks could be developed to provide favorable adjustments to future subsidy rate assumptions for agencies that demonstrably invest in loan performance improvement (i.e., reflect in forward estimates the impact of better systems).
• FCRA mechanism to capture investment savings. Congress could explore whether a narrow, well-regulated portion of savings accruing on existing loans (where attributable to servicing improvements) could flow back to fund further modernization, closing the feedback loop the current statute leaves open.

Each of these reforms would be strengthened by a more frequent operating cadence around the calculations that drive subsidy estimates. Rather than waiting for annual re-estimation to reveal changes in portfolio performance after the fact, agencies should review the underlying drivers (e.g., defaults, delinquencies, recoveries, prepayments, servicing outcomes, and risk concentrations) on a monthly basis. That discipline would give agencies and OMB earlier visibility into whether modernization investments are reducing expected losses, where intervention is needed, and how operational improvements are translating into lower subsidy costs and greater lending capacity. It would turn credit reform from a retrospective accounting process into an active management tool.

The farmer who needs an operating loan before planting season, the first-generation homebuyer, the small business owner who cannot access bank credit — these are the people federal credit programs were built to reach. When the systems behind those programs are modern, accurate, and well-managed, the same appropriated dollar reaches more of them. USDA is showing it can be done. The budget process should be structured to reward it.