Pentagon Quietly Creates New FMS Term Allowing FMF Grants to Cover Interest Costs

A late-December policy memo from the Pentagon’s arms-sales office introduces a technical but consequential change to how U.S. foreign military financing is administered—one that may significantly simplify the use of Foreign Military Financing (FMF) grant aid for key security partners.

On Dec. 23, the Defense Security Cooperation Agency issued Policy Memo 25-111 establishing a new Term of Sale: “Interest on Foreign Military Sale (FMS) Credit (Non-Repayable).” The change takes immediate effect and amends the Security Assistance Management Manual (SAMM) to permit FMF recipients to use grant funds not only for purchases, but also to cover interest accrued on FMF loans.

The memo adds a new Type of Assistance code, inserts a new row—C9.T11—into Chapter 9 of the SAMM, updates standard Letter of Offer and Acceptance (LOA) language, and renumbers several sections. While largely procedural on its face, practitioners say the policy resolves a longstanding structural inefficiency in FMF execution.

“This is a fascinating change,” said Brian Hobbs, a veteran security-cooperation adviser. “It makes it easier for FMF aid to be used for its primary purpose—buying items and services—while simultaneously introducing a new code in the same paperwork to improve how FMF grant aid is processed to pay the interest accrued on an FMF loan.”

Interest costs associated with FMF loan-backed FMS cases create a fee on a subsidy. The new non-repayable interest term allows those costs to be more easily absorbed without placing additional burdens on the recipient country, reducing administrative complexity and potentially eliminating the need for a second issuance of FMF to cover interest fees. In effect, the FMF grant to cover FMF loan interest fees becomes what Hobbs calls “a subsidy employed to subsidize a subsidy.”

“Most people will not notice this change,” Hobbs said. “It is a bigger deal than almost anyone will recognize.” For example, Romania and Poland serve as two visible examples using mixed baskets of FMF funding, as both repayable loans and non-repayable grant aid. Both countries were issued FMF as repayable loans to obtain U.S.-produced defense items and services, then both countries received an additional separate round of FMF as non-repayable grant aid to pay off the interest on the FMF loans.

By introducing new procedures for loan recipients using grant aid to cover interest without countries committing additional national funds, the policy ensures that FMF loan beneficiaries can more effectively optimize the full value of their allocations. Furthermore, the change makes it easier for security cooperation personnel to process complex FMF interactions, and fits within Trump Administration and Hegseth initiatives to improve arms export efficiency as part of accelerating acquisition reforms.

Visibility into how widely the new term will be used may remain limited. “Most of us will never see Defense Finance and Accounting Service records that use these codes.”

Even so, the update underscores how incremental adjustments to SAMM coding and LOA structure can carry substantial policy and budgetary implications, even when they pass largely unnoticed outside the security-assistance community.  [14630]