In a bid to combat the effects of rising interest rates, states across the United States are witnessing a surge in demand for state-subsidized, low-interest loans. These little-known programs, which utilize state funds to stimulate private investment, have gained popularity as interest rates on loans from banks have increased. The Federal Reserve’s repeated interest rate hikes, aimed at curbing inflation, have made loans more expensive for various sectors, including farmers, small businesses, and individuals.
Missouri Treasurer Vivek Malek recently began accepting applications for approximately $120 million in state-subsidized loans. However, within just six hours, the demand was so overwhelming that applications had to be cut off. Similar situations have been observed in states like New York, Illinois, and Montana, where programs offering discounted rates on loans have seen a significant increase in public interest.
Under linked-deposit programs, states deposit money in banks at below-market interest rates, which is then leveraged by banks to provide low-interest loans to specific borrowers. These programs have proven to be beneficial, reducing interest rates for borrowers by an average of 2-3 percentage points.
While most states do not currently offer such programs, those that had shelved them during periods of low interest rates are now considering reviving them to assist financially-strapped businesses and residents. Illinois, for example, has nearly $950 million in deposits linked to low-interest loans, a substantial increase from previous years. New York has also witnessed an explosion in applicants, with the number of applications rising from 42 in 2022 to 317 in the past year.
Missouri’s linked-deposit loan program nearly reached its statutory cap of $800 million last May, prompting the state treasurer’s office to reopen applications. However, due to the overwhelming response, the program had to close applications again after receiving 142 applications totaling over $119 million in just four hours. The high demand came primarily from customers of OakStar Bank and FCS Financial, with other financial institutions missing out due to the quick cutoff.
To address the growing demand, the Missouri treasurer’s office is proposing legislation to raise the program’s cap to $1.2 billion, a 50% increase in capacity. This expansion could potentially cost the state $12 million in potential earnings, but it is believed that the economic activity generated from these loans could offset the loss.
States like Montana, Iowa, Kansas, and Ohio have also reported increased demand for their linked-deposit programs, with applications and loan recipients significantly rising. Even states like Oklahoma, where the program has been dormant since 2010, have seen renewed interest from banks in restarting the program.
As interest rates continue to rise, these state-subsidized loan programs have become a viable option for borrowers, offering much-needed relief from the financial burden caused by higher interest rates. With the potential for further expansion and increased funding, these programs could play a crucial role in supporting businesses and individuals during challenging economic times.
