Even More Perverse Incentives with Stanford Law LRAP
In 2019, I blogged about how Harvard Law’s LIPP’s top bracket created perverse incentives when combined with state and federal income taxes. LIPP’s top bracket requires earners to dedicate 80% of their marginal income to repaying their HLS student loans. When combined with state and federal income taxes, this means that people in this bracket could face a greater than 100% marginal “tax” (i.e., tax+LIPP) burden, thus disincentivizing higher earnings and increasing burdens on LIPP. HLS has revamped their LIPP policies since then, but the 80% marginal contribution in the top bracket still remains.
I was pretty shocked to learn that Stanford Law’s Loan Repayment Assistance Program (LRAP) was even worse: SLS’s top contribution bracket has an explicit marginal contribution rate of 100%. Graduates in that income bracket therefore face a greater than 100% marginal tax+LRAP contribution burden—they would sometimes (often?) be better off earning less and staying in the lower contribution brackets.
To reiterate my point in the HLS post, this is about incentive design, not fairness: marginal contribution+tax rates of 100% or more disincentivize graduate earnings and therefore increase the net burden on the LRAP. With an incentive to always earn more on the margin, graduates should earn more, and therefore place less burden on the LRAP. This is an elementary point of tax policy: marginal tax rates should never be above 100%. It remains surprising and frustrating to me that the LRAP designers at Stanford and Harvard—two of the best law schools in the country—have failed to learn this lesson.
This was originally published on 08/26/23 at cullenokeefe.com. An archive of this post as it appeared on my old website can be found here.