Free College Education

Due to new legislation it does appear that someone looking to retire extremely early, who is willing to jump through a few hoops, can essentially get a college education for free. Income-Based Repayment (IBR) legislation passed in 2009 makes it possible, if your adjusted-gross income is less than 150% of the poverty line for your family ($16,245 for a single person, or $20,295 for a single person living in Alaska), then you don’t have to make any payments on your student loans. You have to provide your tax information to the lender every year to verify your income. And after 25 years, your debt is forgiven.

You can reduce your adjusted gross income in a variety of ways. You can contribute $5,000 of earned income each year to a traditional IRA. You can deduct any business expenses you incur. Contributions to a health savings account lower your adjusted gross income. So you could actually earn upward of $25k to $30k annually or much more if you have a business, and yet still have to pay nothing towards any student loan debt.

Obviously, these policies were written with the typical college student and life-long careerist in mind. Almost no one who is working for a living would seek to keep their income low. But the policy creates all sorts of moral hazards if you consider a person who decides, instead of going to college, to work multiple jobs after high school, saves heroically, and essentially retires at 25 years old with a few hundred thousand dollars to his name.

This person could then go blissfully through a complete undergraduate and graduate academic career. – Studying whatever he wishes and not worrying too much about having to make his resume look good or being overly concerned about what future employers will think of his GPA. He could be in school for anywhere from 4 years, for an undergraduate degree, or 7 or 10 years if he wanted one or multiple advanced degrees. He could, as just about every other typical college student does, live frugally off of federally-subsidized student loans and not touch any of his savings while he’s studying.

Just as an example, let’s take a hypothetical student to see how this might work. Let’s say he found something he liked to study, law, for example, and decided to do 4 years of undergrad in something interesting, then 3 years of law school, just for fun. Let’s say, when he started school at the age of 25, his savings, after years of diligent frugality, were at $300k. His $300k will now have 7 years to mature and compound on itself. If he was lucky and did this during a bull market he might average a 10% annual return over the 7 years, which would essentially mean a doubling of his money.

Our hypothetical student would then graduate at 32 years old with $600k in savings and, let’s say, an outrageous $150k in student loans. Continuing his frugal ways, he sets a withdrawal rate of 2.5% or $15,000 per year for living expenses. He could then take advantage of the Income Based Repayment policy, which only looks at income, not assets, and pay $0/year towards his student loans. After 25 years, his student loan is forgiven.

If at anytime during those 25 years he wants to withdraw more money for some kind of special expense, he would only have to make payments towards his student loans for one year following the increase in his adjusted gross income from the withdrawal, after the year is up, however, he would go back to making $0 in payments per year.

So essentially, our hypothetical student could find himself at 25 years old, with some money in the bank, and be able to accomplish two things by going to school: 1. By living off loans like a typical student his withdrawal rate would be 0% and so his investments would have years to compound on themselves and 2. he gets the enjoyment of stress-free studying of whatever subject he likes without having to consider future job prospects, along with all the advantages that come along with being part of a university’s community.

This would seem like a great option for someone who wants to retire early, but also wants to study something or experience the academic life.

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