I’ve been spending a lot of time learning about the rules for student loans lately. Perhaps my sudden interest is due to dating a girl with a typical medial school debt burden and my desire to help out as best I can. I came across an incredible realization while reading through the FAQs on the Fed’s website, that you can hardly work 10 hours a week, pay barely anything on your student loans, and get it all forgiven in 20 years time or less. Here’s how the plan could work.
How to Live and Work 10 Hours a Week at a Job
This opportunity won’t be available to everyone, but will also be reasonably accessible to the average person. I used to have a side hustle as a Craigslist tutor. I put up an ad saying I could tutor Calculus, Statistics, GRE, GMAT, and a few other things. I was getting $40 an hour for the brief time I did it and could have expanded my hours to 10 a week if I hadn’t been working a full time job. If I had done that exclusively I would have made $17,600 ($40 x 10 hours a week x 48 weeks a year because I take 4 weeks off for vacation). This is approximately the same amount of money I spent during each of my three years living in Philadelphia.
With such a low income level, you might qualify for a host of federal benefits. A cursory examination of some of the big ones like Food Stamps and Section 8 Housing seems like you would barely make too much, but it would be nice knowing you have a security blanket if you wanted to cut back from your leisurely 10 hour work week. On $17,600, you would need to live with roommates and split utilities, but is that such a big deal? In parts of Latin America it’s common for multiple generations to share a one room house with a questionable electrical connection, so you could certainly share a 1200 square foot apartment with another person. If you live in a city you wouldn’t need to own a car, and if you did need one you could pick one up to get around town for less than $5,000.
Making Your Student Loan Payments
Now that I’ve established the spending amount we would have to live with, we can move onto the huge loan burden. The rules on student loans are super complicated depending on when the date of the last student loan disbursement was. I will use the newest rules because they are the simplest to understand. When you take out loans from the Federal Government directly, you get the option to pay them back according to your income and have them forgiven after 20 years or less. For folks falling in the bottom 50% of the earnings spectrum, this is a huge benefit. The way it works under the new Income Based Repayment Plan or the Pay As You Go Plan is you can opt to pay 10% of your discretionary income as payment in lieu of the 10 year fixed payment option.
Let’s see how this would work in this hypothetical example where we’re making $17,600 a year. The current federal poverty line for an individual is $11,770. So by definition discretionary income would be $17,600-$11,770= $5,830. 10% of this figure is $583. So your maximum debt payments under Federal student loan rules are limited to $583 a year, or $48.50 a month. This payment is the same whether your debt is $30,000 or $300,000. Under current federal law, you could go to a private liberal arts college to study basket weaving, follow it up with a 4 year medical school degree, and drop out to work 10 hours a week and your loans are still limited to this $48.50 a month payment.
What’s even more incredible is after 20 years of these payments (the old system required 25 years) the sum is forgiven. There’s a little bit of a catch in that the amount forgiven is taxable as income, so if you had $500,000 in student loans you would probably owe some large percentage of that to the IRS. However, if you have no assets outside of a retirement account, you could declare bankruptcy and watch as the tax judgment is wiped off your record. If you saved aggressively in your 401k or IRA, you could do this and keep your money safe from the government.
What About Health Insurance?
I have discovered how easy it is to get covered first hand as a low income person. I went to healthcare.gov and started a healthcare application. I filled out a few questions about my expected annual income in 2016, and I made something up because I have no idea what kind of money I’ll make, who the heck knows that? I guess if you’ve worked for 20 years in a stable job with no chance of layoffs you have some sort of idea, but I picked $15,000 and started the application anyway.
That’s about the same number as we’re dealing with here so let’s assume you would have the same experience as in this example. Since my wage was above the poverty line I qualified for subsidies with Obamacare and signed up for a bronze plan with a $15 copay for primary care visits. I was pretty stunned when I discovered at checkout that the coverage would cost me $0 a month. The subsidy covered the entire premium. I have to come up with the first $6800 or so if I had a medical problem but I view my chance of needing to see the doctor outside of primary care as very low in 2016 so I’ll take a $6800 gamble all day long, just not a $100,000 gamble that would come from not having health insurance.
I didn’t spend a ton of time reviewing my election of coverage, but I think it would have cost about the same to sign up for a Gold or Silver plan because they offer cost sharing or something like that. Basically if you’re poor getting health insurance is ridiculously easy but also needlessly complicated. Healthcare.gov warned me that if I made too little income in 2016 then I would have to pay for the full Obamacare premium out of pocket because I should have applied for Medicaid. That seems like one of the dumbest things I’ve ever heard of. If you make too little money because of things outside your control, you suddenly owe $2500 or more for premiums at the end of the year when you can’t afford it. Luckily, I have some Traditional IRA money that I can convert into Roth IRA money and artificially increase my income so I won’t have to worry.
So for this example, our $17,600 a year worker just got a $15 copay bronze healthcare plan for $0 a month. Sounds like a pretty good deal for him or her.
Reviewing It All and Realizing You Could Drop Out to Live the Good Life
So you could work for 10 hours a week in some kind of medium skill part time job pulling in $40 an hour and make a reasonable living. Your student loan payments would be limited to $48.50 a year no matter how high the balance. Finally, your health insurance premiums would be around $0 a month.
You could set up a health savings account that would build up over time tax free. When you got sick in a particular year, your accumulated funds could pay your deductible. What would you do with the other 30 hours a week that most people just turn over to employers to use for whatever they feel like? Hopefully it would involve making time for neglected hobbies, great books, trips to the gym, and lots of travel.
Is this realistic? Would you want to work only 10 hours a week? Most people like having a purpose in life and one way to get that purpose is by working because it gives you an identity. I’m simply suggesting that a really incredible living standard can now be achieved in modern society without very much effort. Once that standard of living is met, you can seek your life’s purpose wherever you want. As long as you do not go and subscribe to the debt fueled lifestyle of materialism, you can live a life free from stress and focus your time on other things. That’s what this lifestyle of early retirement is about to me. I’m hopeful that even if you have no desire to stop working anytime soon you can work towards financial freedom because once you’re there you will feel like you’re working 10 hours a week. The reason? Because you no longer have a need to trade hours in your life for money, which allows you to do whatever you want with your time. Keep reading this blog and I promise I’ll work to get you there.
Would you ever want to work 10 hours a week? Comment below!
After reading this, I am curious how you feel about the morality of using these government programs when you have the resources to not need them. Not to pass judgement. I plan to retire early, and I will consider using these programs too, but I feel like it can be a serious problem if many people start to take advantage of these programs.
In essence, if you choose to retire early with hundreds of thousands of dollars in the bank, you can still claim a lot of government programs like free obamacare or medicaid just because your income is low. By doing this, you are creating a bigger burden on tax-paying Americans who now have to pay more in tax to support those who are on these programs. In reality, you could afford to pay for your own heath care with all the investment income you have, but this might slightly extend your retirement date if you have to plan for this extra spending.
Similarly, using these student loan forgiveness programs just because you’d rather take the easy road also is putting a larger burden on the tax-payers. If you decided to take a loan out to get a degree, it seems dishonest not to honor paying that loan if you are capable of getting a job and paying it.
These programs were clearly intended for people who actually cannot afford to pay their loans or pay for insurance. I suppose it really is the government’s fault for allowing these programs to be so easily exploited. They ought to look at your net worth, not just salary, when determining eligibility. Nevertheless, they are easily exploited, and this is a problem. If this early retirement thing catches on and more people exploit these programs, which might happen considering how many government safety nets are now in place, it will really hurt the economy. The sad thing is that this will make it harder for those who are still working to reach their (possibly early) retirement goals.
Thoughts?
I’m curious about what Travis has to say about this as well. If everyone used these programs when they didn’t really need to they’d be (even more) strapped for cash.
Travis seems to be the type that wants the “free lunch” to stop, but is the first to take it while it lasts. Being in a privileged position he gets to choose that route but could be fine without it. Meanwhile there are others who really do need these programs and actually have to worry about their health care costs or paying off student debt on a teacher’s salary. As Travis says “money is security”, so he can feel safe with his piggy bank. But what about those who weren’t able to get such a good start in life and do depend on these programs for sometime? Do you think most users are proud of using these services or would prefer get off of them? I would bet most wish they didn’t need to take the handout, yet “Tmoney” with cash in the bank is the one bragging about using them…
My philosophy on using these programs is similar to that of Warren buffet utilizing the tax code to pay a lower effective tax rate than his secretary. He is one of the loudest voices calling for higher taxes on the wealthy yet is more than happy to take advantage of all the legal loopholes he can get while they last. If the program exists you should exploit it for maximum advantage. The fault lies with the politicians who created it and the voters that support them in my view.
That’s why he’s the biggest hypocrite.
Well I’m glad you have faith in politicians to right the wrongs of the world. If only more people took the same (in)action, everything would be fixed!
If you owe 200000-300000 in Student Loan, wouldn’t it be better to find a job, work hard, pay back your loan, spend less, save your money and then retite early, instead of taking the advantage of the hard earned tax money we were forced to pay to support people who think like you who treated these programs as if the country owes them? I don’t mind helping the needy, I repeat, people who are really in need, but not people who choose to live on other people’s hard earned money. Remember these are not government’s money, it’s ours “confisticated” by the government and wasted by all the so called civil servants and give out freebies in the name of taking care of the poor. Socislistc policy like this will not redistribute wealth, but only make everybody equally poor.
Unfortunately close to 94 million people probably think like you and decided to improve the unemployment figure by staying out of the work force and get free money from mr. O. I wonder how much longer can we continue to sustain these programs when the unemployment rate is crumpling down to zero, i.e., everyone decides to take advantage of these programs and not work anymore. In fact the obama care that you take advantage of is failing in many States and are facing bankruptcy soon because too many people who don’t contribute ate using it. Good luck to rely on your government to take care of you and your family. Big companies, the latest being pfizer, are moving out of the country because of high tax, how much longer can they continue to print money to give away? As a financial advisor, you should have taught people the right way and attitide to take care of themselves financially and not to encourage them to count on govt hand outs. Unfortunately I see that you yourself too are doing the same thing.
If you take Social Security payments, accept Medicare coverage, or accept tax deductions on silly things like mortgage interest, you are doing the same thing as accepting free Obamacare as an early retiree. If the rules exist, you might as well take advantage of them because we will all be paying for them one day regardless how much you used the programs. Usage of a program and political opposition to it are not inconsistent.