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For Young Entrepreneurs, Student Loans Create a Persistent Obstacle

  • Young entrepreneurs with student loan burdens may opt to seek work with an existing company instead of starting their own
  • Heavy debt can not only be a restricting factor, but also limit the ambitions of entrepreneurs who decide to take the leap
  • President Joe Biden has pledged to forgive $10,000 in student debt per borrower, though there has not yet been any action on this promise

Launching a business can be a challenge for any entrepreneur, but young college graduates with this ambition often face the added challenge of student loans. Saddled with a heavy debt burden right out of the gate, these entrepreneurs may be more cautious in their endeavor or give it up entirely, opting for the stability of employment with an existing company instead.

Student loans have become a more pressing concern for young entrepreneurs in recent years. Federal Reserve data shows that student loan debt has more than tripled since 2006 to $1.7 trillion, with approximately 45 million adults carrying some debt load; the average student loan borrower owes about $32,000. Graduates have also become more concerned about how long they’ll have to carry the debt, with one study finding six in 10 student loan borrowers expecting to still be paying off their loans in their 40s.

As student loan debt grows, younger entrepreneurs have made up a smaller share of the entrepreneurial field. The Kauffman Foundation finds that new entrepreneurs between the ages of 20 and 34 have declined from 34 percent of the overall share in 1996 to 27 percent in 2019. This has led to some concerns of how this trend will impact the overall U.S. economy, since small businesses account for a large share of the nation’s new job creation.

A large student loan debt, coupled with the lack of credit history young borrowers often have, reduces the chances that an entrepreneur will qualify for a business loan. Younger borrowers also tend to have less personal funds available to invest in their own venture.

A psychological effect of student debt is a greater tendency for risk aversion. Those who already carry a significant debt burden may be more concerned with the potential for business failure, which could further stress their finances. Those who do choose to launch a business with student debt are often reluctant to take on too much risk; in this way, the debt can affect a variety of business decisions such as whether to hire new employees.

Several options are available to entrepreneurs interested in starting a company while managing student loans. These include seeking deferment or forbearance on their loans, securing financing with an income-based repayment plan, crowdfunding, finding assistance through means such as business accelerators, or starting with a low-risk venture while working with another employer.

During his campaign, President Joe Biden supported the idea of forgiving $10,000 in student loans per borrower. Others have called on him to set the bar even higher, forgiving $50,000 in student loan debt per borrower. While these measures intend to have the immediate effect of providing more relief to Americans from the COVID-19 pandemic and economic downturn, they could also free up more resources for potential entrepreneurs.

There has not yet been any action on Biden’s pledge, despite a flurry of executive actions and the release of a $1.9 trillion economic stimulus proposal in his first days in office. With COVID-19 and economic relief taking precedence, student loan forgiveness may not be pitched until later in the year. There is an ongoing debate over whether it would could be done by executive order or whether it would need to be done through legislative action.

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