UT Austin Experiments with Forgiving Loans if Students Graduate in Four Years

Erin Mulvaney , Houston Chronicle | Oct. 5, 2012

The University of Texas at Austin will test next year whether it can increase its four-year graduation rate and reduce student loan debt by forgiving some of those loans to students who complete their academic programs more quickly.

Under the pilot program announced Thursday, 200 fall 2013 freshmen will be offered forgiveness of significant portions of the most expensive loans they take out if they make a set amount of progress toward their degrees in a particular time frame.

“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 finance services.

The new program comes at a time when state leaders are pressuring universities to improve completion rates, tuition is rising and the number of people failing to keep up with student loan payments is increasing.

Federal direct unsubsidized loans must be repaid at a 6.8 percent interest and are given out after subsidized loans and university and private scholarships are awarded to students.

The students will be selected from a random sample of students involved in the Texas Interdisciplinary Plan, a program that offers additional advising and academic support to about 900 students who receive the unsubsidized loans, said Jamie Brown, a financial aid officer for UT’s student financial services.

In Texas, fewer than a third of students at Texas public college graduate in four years, while a little more than half within six years. UT-Austin is one of the leading colleges in graduation rates, with about half of students graduating in four years and about 80 percent within six years.

“Obviously, there is a need to address this issue not only at the university level, but across the nation,” Brown said.

During the past school year, more than 14,000 UT undergraduate students borrowed $60.1 million in the Federal Direct Unsubsidized Loans. Under the pilot program, half of the selected students in fall 2013 would be offered $1,000 loan forgiveness, plus interest accrued if they pass 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 complete 30 hours of degree requirements by the end of an academic year.

Completion of those hours would put students on track to graduate in four years.

Tuition at UT-Austin is $9,792 per year, and students that graduate in four years borrow 27 percent less than those who graduate in five, Brown said.

An average student borrows about $19,000 in four years, $24,000 in five years and $31,000 in six years, according to recent data collected by UT Financial Services.

A recent U.S. Department of Education report showed that the number of people failing to keep up with student loan payments is increasing, with 10 borrowers across the country falling into default within the first three years after their loans are due.

Texas already has a popular financial aid program, the B-On-Time Loan, that offers interest-free loans to Texas undergraduates, forgiven if students maintain a B or higher grade-point-average within four years.

University financial aid administrators hope the program will be expanded to forgive 3,200 students per year if the pilot program is successful, which would be more than double the amount of student borrowers forgiven for the B-On-Time Loan.

About 59 percent of UT undergraduates qualify for B-On Time forgiveness, which is about 1,400 students per year.

A portion of tuition set-aside funds, meant for financial assistance, will pay for the pilot program.

“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.