Hillary Clinton has proposed to change the way Americans pay for college. The money collected by universities will stay the same, the teaching methods will be unaltered, and students will do the same things for the same amount of time. The big difference is that about $ 350 billion in additional taxes will be paid by Americans and then the government will make sure that (at least most of) the money gets to the colleges. Paying taxes instead of tuition will make college more “affordable” for Americans, according to Clinton and most of the media (e.g., nytimes), just as Obamacare made health care more “affordable” despite the overall cost remaining roughly constant as a percentage of GDP.
It occurred to me that a politician could promise to raise the average American’s tax bill by $ 70,000 and then buy each family a Mercedes or BMW at list price. This would be called “The Mercedes and BMW affordability plan.”
One of the interesting provisions of the bill is that, if not paid back via a modest percentage of “income,” loans will be entirely forgiven after 20 years (or 10 years, if working in an official do-gooder job). Consider a Massachusetts citizen who goes through 10 years of college and grad school or professional school, learning a lot of interesting but not very practical material. Towards the end of grad school, the citizen has casual encounters with two different members of the opposite sex earning $ 250,000 each, and retains custody of the two resulting children. Under the Massachusetts child support system, this will lead to a comfortable $ 80,000 per year in tax-free payments, none of which count as “income,” plus additional court-ordered amounts to pay for direct expenses of the child, such as daycare while in grad school or college tuition if it isn’t entirely free by then. The payments end when the youngest child turns 23, at which point all of the student loan debt has been forgiven.
What can the well-educated child support profiteer do during those 10 or 20 years post-graduation to maintain skills and also accumulate savings for retirement? How about… work? To get the 10-year “do-gooder” schedule of forgiveness, the citizen starts a non-profit corporation and accumulates tax-free profits inside the corp. (see this article for some numbers on Planned Parenthood, which is apparently able to bank over $ 100 million per year in profits) Perhaps the citizen pays himself or herself a minimum wage for 10-15 hours per week. After the loans have been forgiven, the citizen can then use the accumulated profit (“surplus” in non-profit argot) to contribute to a tax-deferred retirement account and/or to pay a much higher salary.
What if the citizen doesn’t have any non-profit ideas? The citizen forms a C corporation and works through the C corp., which pays corporate taxes on any profits but retains or reinvests nearly all after-tax earnings. This may not be tax-efficient because if the money is eventually taken out as salary the citizen will also have to pay individual income tax on previous years’ income (this pain could be reduced by moving to Puerto Rico (Forbes)). But, on the other hand, skipping out on hundreds of thousands of dollars in student loan debt should provide a boost to overall financial health. Essentially the citizen meets day-to-day personal expenses from child support and saves for retirement by building up value in the C corporation.
A separate question is how this would work for an American who graduates from college and emigrates to, e.g., Singapore. If he or she renounces U.S. citizenship how does the U.S. then get income data sufficient to calculate the former citizen’s student loan repayment liability?
Readers: What other interesting strategies and outcomes would you expect based on the percentage of income cap and the forgiveness-after-20-years policy?
- Book Review: The Redistribution Recession (economist looks at the effects on working hours caused by home mortgage loan forgiveness)