Student Loan Debt Adds to Startup Anxiety
United States policymakers have an opportunity to reverse the persistent declining trend in the per capita startup rate. Over the next two decades, America will have a record number of people at the peak age for entrepreneurship—30s and 40s—who have been exposed to an unprecedented amount of entrepreneurship programs in higher education and popular culture. As that window of opportunity nears, an important policy barrier will need to be confronted: student debt and the anti-entrepreneurial incentive it represents.
According to a Forbes report, nationwide student loan debt reached an all-time high of $1.2 trillion last year, and two-thirds of students graduating from American colleges and universities were burdened by student loan debt. “It’s a negative sum game for both student-borrowers and the economy,” it reads.
Until debt burden is off their shoulders, the risk tolerance of young professionals is understandably diminished. Those in their 30s and 40s are usually just finishing paying off college debt, let alone their graduate degrees. This means that once they reach the documented peak age, they are less likely to have accumulated startup experience or perhaps even to have toyed with a business idea. In fact, measures of entrepreneurship among the young in the workforce range from stagnant to falling. From a practitioner’s perspective, all the hard won cultural capital for entrepreneurship seems to be offset by this generation’s debt-anxiety.
The Kauffman Foundation’s E.J. Reedy, and Arnobio Morelix have recently discussed data showing that the total outstanding federal student loans have grown by more than 112.5 percent since 2007. Millennials, heavily saddled with student debt, could risk becoming the new lost generation, they argue.
In fact, almost 23 percent of respondents to the 2013 Young Invincibles survey stated they had put off starting a business because of monthly student debt payments owed to private lenders. It is not surprising therefore, that 81 percent of survey respondents aged 18-34 supported the idea of student loan forgiveness for young people who start a business (see the “Young Invincibles Policy Brief”).
Looking at the issue through another research model, a September 2014 study by researchers from the Federal Reserve and Penn State University found “a significant and economically meaningful negative correlation between changes in student loan debt and net business formation”. For this study, they focused on the smallest group of small businesses, those employing one to four employees, which tend to depend most heavily on personal debt to finance new business formation. Based on this research model, a standard deviation increase in student debt reduces these businesses by 25 percent on average between 2000 and 2010.
Unshackling Student Entrepreneurs
Unlike other types of debt, student debt cannot be discharged through a bankruptcy procedure. Since the 2005 change in bankruptcy law, student debt can only be forgiven for exceptional reasons such as severe and permanent disability. A student’s credit capacity is therefore naturally lower.
Some young entrepreneurs have successfully crafted a 30-year payoff plan and moonlighted as entrepreneurs to minimize anxieties of startup failures in the first few years of their companies’ existence. Others have freed up capital to put toward a startup by reducing their minimum monthly payments through the Income-Based Repayment option (IBR). A 2011 executive action expanded the terms of the IBR, allowing many low-wage earners to cap their monthly loan repayments at 10 percent of their discretionary income (previously 15 percent) and possibly have their loans forgiven after 20 years of responsible repayment (previously after 25 years of on-time payments).
Deference and forbearance have been other explored paths. Last year, the Rhode Island Student Loan Authority started looking into the possibility of temporarily forbearing or reducing payments for recent graduates who start a businesses or go to work for a new venture. However, like with IBR, initiatives to temporarily delay minimum monthly payments on private loans still allow interest to continue to accrue on the unpaid debt.
Georgetown University has decided to confront the issue through a new program. Its “Startup Stipend” program offers relief from student debt anxiety for graduates seeking to take the entrepreneurial career path upon graduation. Also known as “reverse scholarship”, the program embodies the concept of a periodic stipend for graduating students to make student debt payments, without any startup equity requirements. Selected recipients will receive a stipend commensurate to the amount of debt payments they would be making after graduation as long as they continue to work on their startup, up to a maximum of two years after graduation. In addition to this financial assistance, the university makes its entrepreneurship resources such as mentoring, programming and networking opportunities available to the recipients.
Others schools have since begun designing similar initiatives but they are exceptions rather the norm.
Longer-term Prospects for Student-Loan Load
Addressing the cash flow bottleneck upon graduation is a short-term solution. Re-evaluating the soaring prices and stagnant quality of education are even more challenging long-term areas. Four-year public colleges saw average tuition double between 1988 and 2013, climbing much faster than the prices of other goods and services, according to the Brookings Institution.
In addition, these students are confronted by overall weaker career prospects than in the past, leading some thought leaders to deal with the growing belief that the benefits of a college education are not really worth the costs. This is in part because many recent graduates and their parents are seeing shrunken paychecks, and a shrunken career job market, feeling over-qualified or worse—unemployed.
It appears that sustained increase in the sticker price of college has not been matched by increased employability, with many students paying additional amounts to get the skills they need in today’s economy. The New York Times recently reported on the highly-demanded coding boot camps, for example, many of which are accepting some of their graduates’ earnings as part of the payment. Addressing the exorbitant rise in the costs of education and quality of education clearly calls for policy action.
Millennials are undoubtedly a generation with strong entrepreneurship potential and student debt pressure is one possible reason for declining rates of new firm formation by exerting a brake on this wave of entrepreneurial growth. America offers an abundance of opportunities for anyone from any background to test their entrepreneurial aptitude in startup communities and programs. It would be unfortunate if young graduates have to take steps back from that front line of birthing new ventures on account of the added risk of heavy student loans.
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