Is it safe to modify %USERPROFILE%? What are the implications?

To some extent, yes, you can, in effect redefine %USERPROFILE% by using a directory Junction. But there is a caveat with this approach. While you can copy all the files (including hidden) to a relocated directory (for instance with robocopy), I haven't as yet come across a utility that can copy junctions which are already defined and exist in %USERPROFILE%. One option is to create them manually (there are about 16 of them) but do not know the consequences of this. (My understanding of junctions defined in %USERPROFILE% is that they are intended for compatibility of applications ported from WinXP and Vista and if these junctions are missing I do not think it's a disaster beyond an error message for a missing location -- which the directory junction could have pointed to on Windows 7. But cannot be sure...).

Some people have suggested the use of Registry editing for User Profile path. I tried this out of curiousity and it got messy and I gave up. I discourage you from using this approach.

Why are we revisting the eternal question of %USERPROFILE% again and again? Because, Microsoft Windows fails to address one very important issue: A CLEAN SEPARATION OF USER DATA FROM PROGRAMS. Why this very important point is overlooked (and still being overlooked) I never understand. If we have a clean separation of user data and programs, we can even make a physical separation for better security, say programs on C:\ and user data on D:\  (be it a partition or different drives). That way, I clearly know how to look after my data. I can always re-install the software but ...