Does Loan Forgiveness = College Completion?

A new experimental program at The University of Texas (UT) is testing whether or not students have a better chance of completing their degrees if they are relieved of a percentage of student loan debt. Here’s how it works: next fall, the university will choose 200 financially needy freshman who have unsubsidized federal student loans. As CollegeScholarships.org explains, unsubsidized loans are those for which students must start paying the interest on the loan immediately, even if they are still enrolled in an educational program. Most students, however, defer the interest payments, which then get capitalized, or added onto the total loan amount. Of the 200 students, The University of Texas says:

• 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.

It’s not entirely clear just exactly what kind of information UT hopes will emerge from this pilot program, but presumably it will provide students with the motivation to continue their studies all the way to college completion. In a press release, the University’s director of student financial services said,

“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. 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.”

Recent statistics about graduation rates in Texas all demonstrate that the state conforms to the declining rates of college completion evident around the nation. For example, this chart by Complete College America shows that out of 100 students who enroll full-time in a two-year degree program, only one of them will graduate on time, while only seven will graduate in four years. At four year colleges, only five out of 100 will graduate on time, and only 13 will graduate in eight years. The remaining students of the 100 may never graduate.

Nice idea – but will it really help?

An open question is what effect loan forgiveness of such a small amount will have on a student’s general economic burdens. While I am certainly interested in the outcome of such an admirable and creative approach to the problem of student debt, to me there’s a pretty glaring problem with this study: CareerCollegeCentral.com reports that the University of Texas costs, on average about $25,000 for state residents. For those students who successfully complete the enrollment requirements, the forgiveness program will still leave them with costs of $23,000 per year.

Much of these costs will be covered by subsidized loans, and other forms of aid, but still: It seems to me that the small amount of financial inducement offered by this program is a bit like giving a man dying of dehydration in the desert a cup full of water. He’ll live for a few minutes more, have a few breaths of relief, but he’s still going to die pretty quickly. Similarly, students are still going to be saddled with the burden of high student loan debt.

Ramifications of this experiment

Despite the concern I highlighted above, there are three specific ways this experiment can be beneficial to higher education in the long run:

1. If this program proves that students are more likely to graduate if they have fewer financial fears and burdens, it may give many the evidence they need to pursue more extensive restructurings of student loan processes or even force a more extensive investigation into ways of reducing such debt accumulation in the first place. Maybe this will even include more commitment to reducing costs or increasing aid.
2. If the study shows that students with less debt will be able to graduate on time, we may also find that they will also be able to participate in activities proven to boost economic growth on a national scale. They may be better able to manage their student loans. For example, as The New York Times reports, the U.S. Department of Higher Education released data in September showing that the  national student loan default rate increased from 8.8% to 9.1%. This hurts the economy in several ways: it puts lending agencies in a tight squeeze, leading them to reduce the amount they are willing to loan future students, and a default on a credit score makes it impossible for new graduates to purchase homes and help the housing market, among other things.
3. Finally, the student loan default rate is highest at for-profit colleges and universities. The USDOE report revealed that at for-profit schools, “15 percent of borrowers defaulted in the first two years of repayment, up from 11.6 percent the previous year.” The UT study, if it shows that students with less debt actually graduate, will provide some evidence that for-profit schools can boost their graduation statistics, and their reputations, by continuing to reform their recruitment practices or even begin to offer to offer scholarships or other forms of non-loan based financing for college. I recently wrote about how one for-profit college, Strayer University, which did just that.

There are probably many more reasons why this experiment at the University of Texas is one to watch. It’s proof that despite all the criticism heaped on higher education lately, there are many innovators out there searching for solutions to the problems of low graduation rates and high student debt. It will be interesting to see the results – and to watch as others also begin to experiment and innovate as they fight to help students.

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