So the new health care bill has some student loan reform thrown in and there are three notable items to review.  First, student loans will now be handled by the government.  Secondly, student loans will be forgiven after 10 years if you work in the public sector and 20 years if you live in the private sector.  Third, student loan repayment is capped at 10% of your income.  I’m not sure about the exact details but at first run it started me thinking into whether I should maximize my student loans and how to time them just right.

First, the student loans I have now are on a ridiculous low rate of 4% or 5% (don’t know exact number at the moment).   The new law caps maximum payment at 10% of your income so crunching some numbers……leads me to believe that it may be advantageous to borrow as much as possible, quit my job (retire early) and live like a king (free health care) working as a low level employee for some government agency.

Please note that this system only works if you have already paid off your mortgage and have a nice safety net (i.e. large amounts of cash reserves).   Here’s a scenario.

Let’s say I make 200k per year.  According to what I read, the maximum payback  on the student loans at this salary level would be 20k per year.   If the loan won’t be forgiven for 20  years then 20 x 20k = 400k.    That’s a whole lot of student loan money to borrow and not very feasible or realistic.   I imagine that I could probably borrow 120k comfortably so…..

But if I make 40k per year then the annual payback is 4k per year!   If the student loan will be forgiven after 20 years then 4k x 20 years = 80k.   In theory, the last 40k is free!

But wait there’s more!   Don’t assume that I would spend the entire 120k on actual education expenses.    I think I can bank about half of the 120k but to be conservative let’s say I can bank 50k.   I take 50k and invest it (preferably tax free or tax deferred bonds) and hopefully earn a rate of 7% or 8% (not impossible if we enter a period of government defaults or bond panic).  Presumably, I’ll lock in the loans at a consolidated low interest rate.

So 50k invested for 20 years at 7% in tax free/tax deferred bonds should yield 202k.   Student loan 80k @ 4% for 20 years = 177k.   The profit = 25k  plus a free 40k and a degree as a bonus.

Keep in mind that the incentive is now there for people to make as little money as possible.   If I make next to nothing then I’ll get free health care and various tax credits….I’m so giddy with excitement that I’m making it a point to study this further in detail as soon as I get more details!