The University of Virginia on Friday announced a new financial-aid policy under which it will replace loans with grants for some needy undergraduates and limit the amount of loans that students from middle-income families can accumulate by also increasing grants for them.

The plan's provisions for low-income students represent a strategy similar to those adopted recently by the University of North Carolina at Chapel Hill and several private institutions, such as Princeton University. But the University of Virginia's plan goes further by also placing a cap on the amount of need-based loans that students from middle-income families can take out.

When Virginia's program, dubbed "Access UVa," is fully in place, by the 2008-9 academic year, officials estimate that they will be spending $16.4-million on the policy each year.

"We hope this is the first of several rethinkings of how institutions do financial aid," said John T. Casteen III, the university's president.

As state funds for public universities are cut and tuition rates are increased, Mr. Casteen said that he has grown more and more concerned about students from both low-income and middle-income families.

Students from the neediest families are increasingly unable to afford college, and more are likely to shy away from higher education because they do not think they can take on large amounts of debt, he said. Students from middle-income families are also racking up increasingly higher loan burdens, and that can limit their ability to pursue graduate school or enter public-service careers, Mr. Casteen added.

Beginning with the class that enters this fall, the university will provide grants in place of all loans that are offered to students from families whose income levels are at or below 150 percent of the federal poverty line, an amount equaling $27,600 in 2003 for a student from a family of four. About 500 undergraduates at the university last year, out of a student body of 13,000, would have been able to take advantage of this policy, according to the institution.

For any student who qualifies for any form of need-based financial aid, the university will provide more grants so that those individuals will not have to take out loans that total more than 25 percent of the amount that it costs an in-state student to attend the University of Virginia for four years. That provision will apply for entering undergraduates beginning in the fall of 2005.

The cost of attendance, which totals $14,520 for Virginia residents this academic year, includes tuition and fees, books and supplies, housing, meals, and personal expenses. For the class entering in 2005, the cap for four years of loans under the policy is expected to total about $16,000.

In announcing the new financial-aid program, university officials also committed to continuing a policy, set in 2001, that guarantees that all undergraduates who qualify for some form of financial assistance will receive aid packages meeting 100 percent of their demonstrated need.

The new policy also will expand the educational resources the university offers prospective and current students about financial aid. The university has agreed, for instance, to expand the staff of the Office of Student Financial Services to provide one-on-one counseling for students and their families, to assist them in applying for financial aid and laying out their aid options.

Mr. Casteen said that policy changes in recent years at other institutions -- including the University of North Carolina and Harvard, Princeton, Stanford, and Yale Universities -- had helped prompt the University of Virginia to craft its own new strategy.

Virginia's proposal drew praise last week from some national higher-education analysts. "This is welcome leadership from within higher education in recognition that student debt is a serious and growing national problem," said Patrick M. Callan, president of the National Center for Public Policy and Higher Education.