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What are Federal Guarantee Laws?

By Kyla G. Kelim
Updated May 17, 2024
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Federal guarantee laws set out the United States government's promise to pay a debt if the original debtor defaults on the loan. A number of federal guarantee laws exist in a variety of programs, ranging from student loans to utilities. Federal guarantee laws typically enable a debtor to qualify for a loan at better terms than would be available without the guarantee of payment.

The Federal Deposit Insurance Corp. (FDIC) is the result of one of the larger guarantee laws, ensuring that funds deposited by citizens in their banks will remain intact. Financial laws such as those authorizing the FDIC ensure investor confidence and the stability of the banking system. Without a federal guarantee, the market could repeat a crash that triggered a run on banks in 1929, repeating a deep depression such as that in the 1930s.

Other federal guarantee laws are designed to bolster a segment of the market that might otherwise flounder in the absence of government backing. For example, many rural consumers would find utilities difficult to get and expensive to maintain in the absence of federal guarantees in the utility markets. The Small Business Administration bolsters the economy by making loans to entrepreneurs at favorable rates that would be unavailable for a risky venture through a private lender. Students can afford to attend college through many federal guarantee laws that ensure favorable rates on student loans. In exchange, the United States benefits from a more educated pool of labor.

Important community programs to assist citizens can obtain low-interest loans through federal guarantee laws. The charitable nature of many programs would make obtaining loans to improve services or make capital improvements difficult in the absence of the federal guarantee. The Pension Benefit Guarantee Corp. (PBGC) ensures that retired workers will continue to receive their pensions if the company doling them out folds.

The federal government does not directly lend money to applicants under the guarantee program, but rather indemnifies the bank that does lend the money. If the applicant defaults, then the U.S. Treasury will pay the balance to the bank. This rate of default is factored into the costs and interest rates associated with the program.

There also are state guarantee laws that operate to a lesser extent under the same principle. One example of this is a state's guarantee of insurance. All insurance policies are governed by state law, but each state has a different guarantee of payment in case the insurance company becomes insolvent.

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Discussion Comments

By titans62 — On Dec 24, 2011

I have federally guaranteed subsidized student loans and I definitely needed them in order to go to school and effectively finish my degree.

However, now that I am in graduate school I am techincally still in school so I do not have to incur interest on my student loans until I am finished with my degree.

Because of federally guaranteed laws, I am able to pay off these student loans while I am still in school without having to worry about incurring interest until I am done.

People seem to overlook the amount of financial aid they can receive for college through these channels and they definitely need to look into these federally guaranteed loans.

By Emilski — On Dec 24, 2011

@JimmyT - I have heard that story and it definitely is something to think about as far as doing good despite illegal circumstances goes.

I have looked at statistics and before federally guaranteed laws for banks were created it was not unusual for hundreds of banks to close in a year.

For most years the number of federally protected banks going under during a year is in the single digits. However, before the Great Depression it was not unusual for the number of banks going under to number in the triple digits and this only got worse during the Great Depression.

Now with the number of federally guaranteed laws concerning banks it is a rather rare occasion for banks to go under like they used to.

By JimmyT — On Dec 23, 2011

@stl156 - I have heard through my college classes that nearly every twenty years at least up until federal protection such as FDIC insured banks, the economy would get low enough that people would start to make runs on banks and this would lead to a recessions nearly every twenty years.

I have heard a story that J.P. Morgan told all his banks to refuse to give people their money in order to avoid a recession, when a run on banks was going to occur, and although highly illegal it did prevent a recession and he was given a pass by the federal government and after the investigation the Federal Reserve was created in order to further back the dollar and back banks.

By stl156 — On Dec 22, 2011

I have heard of FDIC insurance and know a little about it. I know for a fact that your money in an FDIC insured bank will be protected for up to one hundred thousand dollars in a single bank account.

This is a great guarantee because it makes people trust banks more and also give more of a guarantee that the bank is likely to go under and people's money will be lost.

Way back in the old days before FDIC insurance there would be runs on banks and it would cause the banks to lose all their money and go bankrupt. Unfortunately the Great Depression may have not been caused by this but furthered by it after the Stock Market Crash.

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