Income Tax, Income Contingent Education Loans and the Taxpayer Parallax

Abstract

In designing tertiary education income contingent loans (ICL), primary attention has been focussed on designing arrangements which improve access to and affordability of education. In contrast, much less attention has been given to how best to design the repayment of those loans in a way which minimizes any adverse behavioural response by ICL debtors. With more governments moving to increase the student contribution to the cost of their education, the likely magnitude of an individual’s ICL debt can not only impact their education take-up, but once incurred can result in adverse behavioural responses during the ICL debt decumulation phase. This paper argues that two main factors drive the behaviour of those with an ICL debt during the decumulation phase. The first is the basis for determining ICL repayment (including base, rates and thresholds) and the second is the size of an individual’s ICL debt. Just as the interaction between tax rates and transfer means tests combine to adversely impact the transition from welfare to work, the interactions between ICL debt level, repayments and personal income tax can adversely impact the transition from study to work, with implications for ICL repayment and income tax compliance. To provide insight into these issues, the 2011-12 Australian Taxation Office 2% sample unit record file of individual tax returns is examined for differences firstly between Australian taxpayers with and without a Higher Education Loans Program (HELP) debt, and secondly, between those taxpayers with varying levels of HELP debt but comparable income levels. While some strong evidence was found for differences between HELP and non-HELP debtors from the Australian data, the paper highlights the need for more research into this issue before conclusive findings can be made that ICL debt does influence taxpayer behaviour. Such research should be a high priority because in the Australian case, between 2011-12 and 2017-18, HELP debtors are expected to increase 95% and average debt levels 41%.