Will The President's New Debt Relief Programs Help You?

President Barack Obama has announced two plans to offer relief for borrowers overwhelmed with debt. The first, an expansion of the Home Affordable Refinance Plan (HARP), will allow more homeowners with negative equity in their homes (in other words, are “underwater”) refinance their loans into lower fixed rate mortgages. The second, the “Pay As You Earn” program, will expand the relief offered under the Income Based Repayment Program (IBR) by allowing certain student loan borrowers to make smaller monthly payments, based on income, and to have the balances of their loans forgiven after ten or twenty years.

The President says the new changes in the student loan IBR program will reduce monthly payments for 1.6 million borrowers. Borrowers with eligible federal loans will be able to make payments totaling just 10% of their monthly incomes, and have balances forgiven after ten years of public service work or twenty years for other types of employment. Those with very low incomes, or those who are unemployed, may be able to make no payments. The CFPB has also launched a new set of tools to help student loan borrowers better understand and manage their student loans.

[Related article: More Help for Underwater Homeowners]

Changes to the Home Affordable Refinance Program are aimed at helping some of the 11 million homeowners who owe mortgages greater than the values of their homes. The new rules are designed to allow anyone with a mortgage backed by Fannie Mae or Freddie Mac—no matter what they owe—refinance if they are current on their payments, and don’t have recent late payments.

Joe Kelly, principal of ArcLoan.com which has helped many borrowers refinance under the current HARP program, cautions that the final details aren’t out yet, and until they are, “we won’t know exactly who can be helped.” He says that one of the biggest barriers with HARP is getting lenders to participate, and points out that the revised guidelines are supposed to offer some protection for lenders that may help relieve some of that problem.

These programs won’t help everyone, though. The two major groups of borrowers who won’t get relief under these programs are those who:

Have private student loans, or mortgages not owned by Freddie Mac or Fannie Mae. A reader recently wrote on the Credit.com blog:

Why is it always the government loans fannie/freddie that are being bailed out. Is there something in the works for non-government funded loans? I’m in a home currently appraised at 160,000 but I owe 250,000 on a conventional ARM currently at 7.6%. I can’t seem to find anyone willing to refinance and the current lender no longer does refinancing. Positive payment history associated with this loan. Any ideas?

Lynn O’Shaughnessy, a college funding expert, says “The president’s decision to open up the federal income-based repayment plan to more student loan borrowers should be a huge help. The move will make federal student loans even more desirable. Unfortunately, too many students turn to less desirable private loans before they max out their federal options.”

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Have fallen behind on their student loans or mortgages. Though mortgage delinquencies have been dropping, with 3.9% of mortgages 90 days or more behind, some two million homes are still in some stage of foreclosure, according to Lawrence Yun, chief economist of the National Association of Realtors. Even under the new HARP guidelines, borrowers will not be eligible to refinance unless they are current on their payments, have no late payments in the last six months, and have not made more than one late payment in the past year.

For student loans, IBRinfo.org states that borrowers cannot be in default if they want to take advantage of IBR. According to their website, “If you are able to get out of default, you will then be able to choose IBR or another repayment plan.” The Project on Student Debt has noted an uptick in student loan defaults in recent years. They say the “official “two-year cohort default rates” show that 8.8 percent of student loan borrowers who entered repayment in 2009 had defaulted by the end of 2010, up from 7 percent for those entering repayment in 2008.”

With most loans, borrowers who can’t keep up and can’t work out alternative payment arrangements with their lenders often end up resolving their debts in bankruptcy. But student loan debts are extremely difficult to discharge in bankruptcy, and it is also very difficult to get a principal reduction on a mortgage for a primary residence in bankruptcy. And until that changes, relief for those who most need it may be a long time coming.

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Image: Wikimedia Commons