Pilot Program Aims to Increase Four-Year Graduation Rates and Reduce Student Loan Debt

The University of Texas at Austin is testing a program to measure whether students can be encouraged to complete their degrees quickly by offering them forgiveness of the most expensive loans they must borrow to attend the university.

"The university is focused on improving our four-year graduation rate, and the pilot program is part of its broader effort to help achieve that mission," said Tom Melecki, the university's director of student financial services. "Students will benefit from the program by having a portion of their loans forgiven if certain degree requirements are completed within a set time frame."

More than 14,000 undergraduate students borrowed more than $60.1 million in Federal Direct Unsubsidized Loans at the university during the past school year. These loans are generally borrowed by students who demonstrate financial need and carry an interest rate of 6.8 percent, with interest accruing from the date loan proceeds are disbursed to the student.

For this pilot project, the university will select 200 freshmen entering in the fall of 2013 who have been awarded Federal Direct Unsubsidized Loans on the basis of financial need. Half of the students would be offered loan forgiveness in the amount of $1,000 on the principal, plus interest accrued if they successfully complete 15 hours of their degree requirements by the end of each semester. The other half would be offered $2,000 in forgiveness, plus interest accrued, if they successfully complete 30 hours of applicable degree requirements by the end of the academic year.

The inspiration for the pilot program is the State of Texas' B-on-Time Loan program, which offers interest-free loans to undergraduates who are Texas residents. The loans are forgiven for those who graduate with grade-point averages of B or better within four years of starting college (five years in five-year curriculums such as Architecture). The B-on-Time program looks at a student's entire academic record and does not reward annual progress toward a degree.

Although the B-on-Time Loan program has many benefits, the number of loan recipients pales when compared with the Federal Direct Unsubsidized Loan. The pilot program, if successful, could be expanded to forgive 3,200 students per year more than double the amount of student borrowers most recently forgiven through the B-On-Time Loan program.

The pilot program, which does not require new state funding for implementation, will be financed with a small portion of the designated tuition set-aside. These funds are designated by the Texas Education Code to fund financial assistance that "may include grants, scholarships, work-study programs, student loans, and student loan repayment assistance."

According to the most recent data available, the average principal amount borrowed by a student who borrows and graduates in four years is $19,112, while the average principal amount borrowed by a student who borrows and graduates in five years and six years is $24,568 and $31,911, respectively.

"If it proves successful and we extend the program over four years of enrollment, we estimate that the total amount forgiven will be a little more than $8,000 per student but that, in the long run, this will reduce the amount students must repay after graduation by more than $12,000," Melecki said. A report of the pilot's results will be made available to the state Legislature in the fall of 2014.