Young Americans have a lot of potential for entrepreneurship, but they also face several hurdles. One of the biggest issues that potential founders face is their student loans. When we’re facing hundreds of thousands of dollars in debt, it can seem foolish to pursue entrepreneurship rather than a job with a guaranteed income. Even people with excellent business ideas and backing from notable venture capitalists have abandoned their dreams once they get a job offer with a salary.
It is this type of scenario that is threatening to negatively affect the United States’ recovery from the COVID-19 pandemic. While the focus has been on saving existing small businesses, encouraging new entrepreneurship is expected to be an important part of economic recovery, especially considering how much startups drive the creation of new jobs.
Startups take the lead in innovation and put pressure on larger organizations to change their operations. Also, they are in a unique position to respond to sudden changes in consumer and business behavior. Despite these advantages, startups struggle to compete with larger companies and often have insufficient access to capital, which increases the riskiness of entrepreneurship. The burden of student debt is only one of many stress factors that potential entrepreneurs must deal with. The issues caused by student loans expand beyond the pressure of large monthly payments after graduation.
The Limitations Created by Significant Student Loan Debt
For many people thinking about starting a company, student debt seriously limits their available resources due to the amount of money that goes into paying down their debt every month. Plus, debt negatively affects credit score and can make it quite difficult to secure a business loan.
The burden of student loans can explain some of the decrease in entrepreneurship among young Americans. In 1996 people between 20 and 34 accounted for 34 percent of all entrepreneurship. By 2019, this number had fallen to 27. A survey conducted that year found that about half of college graduates interested in entrepreneurship cited student loans as the biggest deterrent to starting a business.
The situation has become so dire that legislation was introduced in 2017 that would offer student debt relief for certain entrepreneurs. The senator who introduced the bill said that she regularly heard from college students who said they had great ideas but did not feel like they could pursue them due to student debt. About 60 percent of student borrowers expect their debt to last until their 40s, which means it could affect people for decades following graduation. While the bill was not put to a vote in 2017, there is a plan to introduce it again in 2021.
The Problem of Pursuing Entrepreneurship with a Day Job
Some people are so determined to found a business that they launch it while working a full-time day job to cover student loans and other bills. However, this method can be draining, both physically and mentally. Plus, you will likely hesitate to leave your day job as you do not have the resources required to run your new company full time.
This limitation keeps many people from growing their business at the rate they could if they did not have debt and did not require a guaranteed minimum source of income. Professors of entrepreneurship have noted the dilemma of whether to pursue a startup or take a job offer frequently faces many students.
Unfortunately, companies that do not get the full-time attention of their founders tend to take significantly longer to grow and start earning revenue. Then, these companies become slow to turn a profit. As a result, the companies are more likely to fail, especially since founders can feel drained due to other responsibilities and simply give up on the startup. The other issue is that after-hours entrepreneurs have virtually no access to funding. No investor wants to give money to a person pursuing a project on a part-time basis. The unfortunate truth is that this situation can make it seem like the founder is not committed to the project.
The Potential for Policy to Address the Student Loan Problem
The idea of forgiving or reducing student loans has become an important political point in the past year. Both the CARES Act and an executive order from President Donald Trump were aimed at providing student loan relief during the coronavirus pandemic, but these approaches were temporary and limited.
Joe Biden has expressed his support for forgiving student loans, and many other lawmakers have advocated for similar solutions. A study from Bard College estimates that student debt forgiveness could raise the GDP by up to $108 billion per year while lowering unemployment. Importantly, forgiving student debt, whether fully or in part, could help address some of the steep drops in startup rates that have existed since the 2008 recession.
However, there are other ideas for providing relief. For example, the bill mentioned above would make it possible for startup founders and their full-time employees to defer student debt without interest accrual for three years. Another bill proposes allowing founders to consolidate their debt into a fixed-rate loan with a monthly payment capped at $200. This legislation would also forgive debt for people who have paid at least $12,000 over five years while launching a business. However, if these entrepreneurs make more than $250,000 in salary and equity in the 10 years after forgiveness, they will owe a small percentage of compensation to the Treasury.