Loans Can Stabilize Transit Funding

This piece is part of IFP’s Transit Abundance Playbook, a collection of proposals for reducing American transit construction costs.

Summary

Most federal support for US transit and rail capital projects comes in the form of discretionary grants, which warp incentives and drive up project costs. By contrast, predictable multi-year funding is the norm in peer countries, and its reliability has enabled them to build in-house expertise and deliver projects at speeds and costs unmatched in the United States. To achieve more of these benefits in the US, Congress should enhance existing loan programs, streamline their application processes, and expand underwriting capacity. These improvements would create a stable and predictable source of support for transit project sponsors at minimal cost to the federal government. By initially targeting rail electrification and other underbuilt, positive-return investments, programmatic loan finance will help build institutional capacity that can sustain a pipeline for future projects.

Problem

The United States lacks stable funding for transit capital improvements. This raises costs, both because unpredictable funding hinders the development of state-, local-, and agency-level expertise and economies of scale, and because federal grants — seen as “free money” by transit project sponsors — incentivize irresponsible spending. While local matching requirements pay for a substantial share of project costs, discretionary federal grants still make up a large share of construction costs.

Despite their shortcomings, discretionary grants have proliferated over time. In 2008, the American Recovery and Reinvestment Act (ARRA) created the discretionary Transportation Investments Generating Economic Recovery (TIGER) grant to support shovel-ready transportation projects and job creation during the Great Recession.¹ However worthwhile the aim, the program’s focus on providing economic stimulus and jobs is unrelated to fast, efficient project delivery. Similarly, the 2021 Infrastructure Investment and Jobs Act (IIJA) sent a surge of money to new and existing discretionary grant programs, but it did not create new funding frameworks that enable project success. Discretionary grants now provide funding for everything from sub-$200,000 multimodal planning activities to large-dollar megaprojects.² 

Grants have their place, but they should not be the default means by which the federal government funds capital investment in rail and transit, and they are particularly ill-suited for the most complex and capital-intensive projects. The Massachusetts Bay Transportation Authority’s (MBTA) Boston Green Line Extension (GLX) project is emblematic of how grants can lock in half-baked proposals and disincentivize comprehensive design and cost discipline upfront. In the case of GLX, intersecting political deadlines (including a pro-transit governor leaving office) led to a rush to secure an FTA grant; one senior official noted that rushing to secure a Full-Funding Grant Agreement (FFGA) compromised project planning. 

It’s unsurprising that agencies may rush to secure funding, but the structure of Capital Investment Grants (CIG) only exacerbates the bad incentives. For example, the MBTA chose a novel (for the agency) project delivery framework because they believed it would secure a CIG FFGA faster. Because CIG doesn’t reimburse initial planning costs, the MBTA’s consultants, facing cost pressure, used back-of-the-envelope cost estimates based on historical data rather than compiling more current data. This grant-induced rush led to a substantial cost underestimate, and the project ultimately had to be redesigned, delaying delivery and bloating costs. 

In the words of former Utah DOT director Carlos Braceras, discretionary grants are “beneficial but unreliable.” Because grants are oversubscribed and awarded based on vague criteria, applicant agencies can’t count on receiving the funding they need, undermining their ability to plan and build capacity. In 2024, the INFRA and MEGA programs, which support megaprojects, received $27 billion of total requests for only $4.2 billion in available funds. This is not just a recent trend: in 2008, BUILD, one of the first modern multimodal grants, had just a 3% selection rate.³ Even a highly rated proposal can’t be certain of an award, resulting in pervasive project-level uncertainty. This makes it difficult to build a pipeline of projects and any kind of durable agency capacity.

The certainty of stable funding enables better project delivery, economies of scale, and increased state capacity. In response to consistent funding, states and localities can build out their capacities, thereby improving project delivery. For example, the MBTA recently completed an estimated $2 billion worth of trackwork for around $600 million under its accelerated Track Improvement Program (TIP). TIP was primarily supported by state bond issuances rather than relying on unpredictable federal funding, which allowed the MBTA to hire in-house staff. Agency officials have emphasized that the savings were accomplished in part by insourcing essential functions, including hiring staff capable of continuously welding subway track. The MBTA identified increased professional service insourcing as a significant optimization in its FY2025 expenses, which ran $154 million below projections. Beyond this example, recent research shows that building the scale and quality of in-house capacity lowers project costs. But similar successes are hard to achieve under the “windfall” funding model typical of discretionary grants, which makes retaining public-sector talent difficult. 

Countries that build faster and cheaper share a common advantage: predictable funding that allows greater project-level certainty. Scotland has maintained a continuous pipeline of electrification projects since 2010, and Scottish electrification costs have fallen from £2.7 million to approximately £2 million per single-track kilometer ($5.9 million to $4.3 million per mile) over the past five years, roughly half to two-thirds the cost of comparable English projects. England, which operates under the same national standards, regulatory framework, and supply chain, has pursued electrification in irregular bursts. In January 2026 testimony to the Railways Bill Public Bill Committee, Siemens Mobility’s UK managing director estimated that the boom-and-bust funding cycle inflates the cost of electrification and signaling work by roughly 30%.⁴ The Railway Industry Association reached a similar conclusion in its 2019 Electrification Cost Challenge, finding costs are up to one-third lower when paired with steady investment.

The United States has the beginnings of a more stable funding regime, but existing loan programs lack capacity and focus. The Railroad Rehabilitation and Improvement Financing (RRIF) and Transportation Infrastructure Finance and Innovation Act (TIFIA) programs provide loans to rail and transit projects at low, near-Treasury interest rates, with repayment periods of up to 35 years and payment deferrable until after project completion. But these programs, and RRIF in particular, have been neglected for decades. RRIF has $35 billion in lending authority, but as of 2023, the program had closed only around $7.6 billion in total financing across its history. A GAO analysis found the Build America Bureau, which administers both programs, to be chronically understaffed and lacking even a basic implementation plan or performance indicators for the programs.⁵ Sponsors reported that delays and uncertainty in the Bureau’s application review process led to cost increases for two of ten reviewed projects and construction delays for a third. A separate USDOT audit found loan applications stuck in review for over a year. 

RRIF also still lacks a standing credit subsidy. Unlike TIFIA or the Department of Energy’s Loan Programs Office, RRIF requires borrowers to cover risks associated with the loan; although the IIJA authorized $50 million per year to cover these costs, the funds have not been appropriated, which means the costs “must be borne by the applicant.” Historically, the borrower had to pay an upfront credit risk premium payment; after 2024, the upfront payment was eliminated, but the premium remains as an interest rate spread. Without more appealing loan terms or a faster underwriting process, these programs often act as budgetary gap-fillers rather than as credit programs that enable “bankable” projects, which can pay for themselves over time by increasing revenue or reducing maintenance costs.

Solution

In the near term, scaling and streamlining RRIF and TIFIA can encourage better cost discipline and provide reliable, programmatic funding for transit projects. To build confidence around an alternative funding model and best use loans that must eventually be paid back, these programs should target bankable projects that will reduce total costs and create cost-effective ridership or revenue growth. These types of investments generate the means with which to repay the loan over time. Moreover, loans allow the use of a local match for repayment; both RRIF and TIFIA authorize the use of tax revenue as collateral.

Although repayment means that loans do not fully offset project costs like a federal grant would, a loan still provides upfront resources and has the added benefit of accountability. And unlike grants, loan finance is scalable: while each dollar of the grant is a “cost” to the federal government, loans must be repaid, so the government can issue more of them at the same net cost. 

To expand the use of loans in transit project funding, the Build America Bureau should take on an expanded role akin to the Department of Energy’s Loan Programs Office (LPO). LPO conducted proactive, government-to-business outreach and publicized its programs and goals, allowing it to build a robust pipeline.⁶ The Build America Bureau should likewise identify clear investment priorities, provide technical assistance to prospective applicants, and evangelize the benefits of RRIF and TIFIA to build a pipeline of financeable projects. 

Today, RRIF and TIFIA loans support a mix of projects, often backed by dependable revenue sources (like sales tax) rather than by project-linked cost reductions or revenue increases. As loan programs expand, they should prioritize bankable projects (even if some subsidy is still required) where sustainable funding is likely to lead to cost savings and opportunities to build in-house expertise. Rail electrification and subway automation are both underbuilt and likely highly bankable, and good candidates for RRIF and TIFIA initiatives respectively. 

Electrification is a compelling pilot program to build confidence in the use of loans for transit projects. Rail electrification infrastructure is underdeployed in the US, and a lack of know-how and heterogeneous standards drive up costs. Steady funding can enable building a project pipeline that compresses the learning curve, as highlighted by the success of rolling programs in Scotland and continental Europe. Moreover, electrification is a good fit for a finance model: a 2009 analysis found that electrification was associated with 50% fuel savings and 33% maintenance savings, making for considerable cost reductions and strong returns on investment. Electrification also promises improved service on existing routes, due to the improved speed, reliability, and frequency of electric trains, and has led to significantly increased ridership globally — Caltrain has seen ridership jump 57% in its first full year of electrified service. This combination of decreased operational costs (per vehicle-hour) and increased ridership makes for favorable returns on investment. For example, the initial business case for Greater Toronto’s commuter rail modernization program projects that the suite of capital investments will move farebox recovery from 83% to 110%. Because electrification in the US is so underutilized, there is low-hanging fruit available — and an empowered financing entity could ensure that future buildouts follow international best practice.

There is potential for a substantial pipeline for electrification projects in the US. The Biden Administration’s Rail Action Plan considered electrification both in the short-term on commuter rail networks and on the national freight network writ large. The MBTA is considering wiring half of its commuter rail network with overhead catenary wires as part of a “discontinuous electrification” strategy, and the California State Rail Plan calls for “more than 440 miles of electrification.” Yet few of the planned projects are already funded or under construction. Building out a favorable financing program would encourage transit agencies to prioritize these valuable projects in their capital plans, enabling cost reductions and building agency expertise, while also providing an opportunity to standardize on proven methods. Other candidate projects could include automation, infrastructure improvements to increase farebox recovery, or any other project type that has a good return on investment. 

The Build America Bureau should pursue the following steps to operate as an LPO for transit and pilot a program to provide significant, accessible, subsidized credit for electrification project sponsors. Unless otherwise noted, these steps do not require congressional action.

• Build technical capacity at the Build America Bureau: The Bureau should develop the in-house expertise necessary to conduct due diligence and support loan applicants throughout the application process. The specifics of technical assistance should evolve with applicant needs, but at a minimum should include access to lessons learned and best practices from other rail electrification projects, as well as background on European and Asian rail electrification technical standards. This may not require much additional headcount initially, but staffing should grow as the project pipeline does. 
• Make applying easy: The Build America Bureau should develop standardized term sheets, work with agencies to identify potential loan candidates, and design a low-overhead application process. Successful applications for other funding sources should expedite — or even be sufficient for — securing a loan; waiving loan application fees is another potential process improvement. As capacity is added, the Bureau should emulate EPA’s WIFIA program and telegraph the speed and ease of securing a loan and the advantages of accessible, subsidized credit.
• Exempt RRIF and TIFIA from NEPA requirements: Currently, RRIF/TIFIA qualify as major federal actions and trigger NEPA review. This process can be onerous enough to dissuade agencies from pursuing loan funding entirely. Congress should clarify that the provision of a RRIF/TIFIA loan in itself does not trigger a NEPA requirement.
• Eliminate the credit risk premium for electrification loans: Congress should provide an appropriation sufficient to eliminate the credit risk premium for RRIF loans going to passenger or freight rail electrification. IIJA authorized limited funding for a RRIF credit subsidy for certain categories, such as shortline railroads and TOD projects, but a broader subsidy for rail electrification loans will encourage uptake at far less cost than a grant program of comparable impact.  While IIJA’s elimination of the upfront lump-sum payment was a step in the right direction, RRIF should be a fully subsidized loan, as TIFIA already is.
• Provide half-Treasury rates for electrification projects: TIFIA’s Rural Projects Initiative currently provides even lower interest rates to eligible projects. Offering half-Treasury rates reduces the need for other subsidy and would encourage interest in RRIF’s financing. This requires congressional action and appropriation.

Improving existing loan programs is one pathway to enabling stable funding and proving out its advantages over discretionary grants. Making the Build America Bureau an active body that develops a project pipeline and walks agencies through the loan process, while cutting unnecessary red tape in the RRIF and TIFIA loan processes, realizes these aims.