LIPP's Top Bracket Creates Perverse Incentives
Harvard Law School has a very generous loan repayment assistance program: the Low-Income Protection Program (LIPP). It operates like a progressive income tax: as the participant earns more, they must put a progressively larger marginal percentage of their income towards (eligible) loan repayment (in total, the “participant contribution”), while HLS picks up the rest.
For the most part, LIPP is a well-designed, generous, and thoughtful program. The Introduction to LIPP boasts that LIPP “has no mandatory salary ceiling.” While this is technically true, it overlooks combined repayment and tax implications for the uppermost bracket of LIPP earners (those earning more than $126,000 per year).
The top marginal participant contribution is 80%. 80% marginal contribution would be a reasonable expectation on its own. However, when combined with US federal income tax, a participants’ marginal take-home pay in the top bracket is actually negative until the participant completely phases out of the program (by earning an amount that no longer qualifies for aid under this formula). Specifically, for a taxpayer filing singly, the current marginal federal income tax rate for someone at the bottom of the top LIPP bracket ($126,000) is 24%. When combined with the 80% marginal LIPP contribution, the marginal combined burden on the participant already exceeds 100%. FICA taxes and state income taxes where applicable further compound this problem (though arguably LIPP should not care about the latter due to its policy of location neutrality).
At this level of income, the participant would not qualify for the student loan interest deduction either.
In my view, this is a serious design flaw of LIPP. Specifically, it creates perverse incentives for participants by incentivizing them to not earn any amount between $126,000 and their phaseout amount: it would be better for them to earn $126,000 and not $127,000 (unless they had phased out by then). This costs both LIPP and participants money if they turn down pay in that range.
The easy fix to this would be to tie the top marginal participant contribution of LIPP to the corresponding marginal tax rates, such that when combined they do not exceed 100% (or ~95%, to incentivize earnings).
To be clear, this is not a criticism of the equity of LIPP. LIPP rightly affords more help to participants earning less, and $126,000 less taxes and loan repayments is an enormous amount by global standards, so neither I nor anyone else earning that much would be in a position to complain that the program is inadequate. Rather, the criticism is that the incentives at that income level are perverse.
I also want to be clear that I think, overall, LIPP is a well-designed and very generous program. It has made me very comfortable pursuing a public interest career, notwithstanding my considerable debt from HLS. I hope LIPP will address this flaw to improve the program’s future.