I agree wholeheartedly, so many friends of mine are at step 2. Again, some of my friends with jobs doing what they 'love', developing or design – isn't actually enjoying every bit of it, but somehow seem satisfied with getting payed for doing something they know.
I think you should strive for getting payed to do the things you love, not giving up half way.
The #2 option is a little absurd. Last time I looked up the numbers (for an essay I wrote in 2003) only 3% of Americans had Masters degrees. So you are talking about a very small elite. Roughly 50% of Americans never go to college.
The "do what you love" mantra to me means making conscious decisions that improve the likelihood that you get to do what you love for a living, instead of optimizing for other metrics such as money, or prestige. Or the worst option of all: just winging it.
The mind boggling thing is that many people make no conscious decisions about their life at all if they can avoid it. In the spirit of the underpants meme:
Not only do people often go through both (1) and (2) without really thinking about it (e.g. study Law because "laywers are rich" or French Lit because "I like French books"), there often is no plan for (3). None at all. So people end up doing a PhD as a form of life procrastination, or take a job working with technology that will suck the life out of them (or will seriously limit future job prospects) for marginally better pay.So when you see "do what you love", read "plan your life such that you get to do what you love". And I don't think this can be repeated enough.