The loan-grant program for rural water and waste water disposal facilities of the Farmers Home Administration of the U.S. Department of Agriculture is described. Using concepts found in the literature on the impact of grants on local governments, the consequences of this program for local governments are discussed. The existing theory of grants is inadequate to deal with this type of program because of several attributes of the program, including the use of loans in combination with grants, and the use of user charges to finance part of the aided project.