There are over $1.2 trillion dollars in outstanding student debt owed by tens of millions of Americans. And these numbers are growing.
With a big chunk of this debt being carried by millennials, a natural question for us studying entrepreneurship is: what kind of impact these levels of debt will have on this generation?
While we don’t fully know the answer to this, early results are not encouraging:
Here on Growthology, our team has covered many topics around student debt. My colleague Josh Russell has written extensively why student debt is rising and the structure of student debt.
On this post, I will focus on the ways in which student debt can affect entrepreneurs – especially millennial entrepreneurs, the generation most affected by student debt.
Student debt can affect potential entrepreneurs in a few different ways. There are at least 3 key financial levers affected by student debt, and they are:
1) Cash Flow
As Mark Cuban likes to say, cash is king – and this is true for entrepreneurs who need cash flow to finance their ventures and even living expenses. The monthly loan re-payments of student debt put a recurring burden in the cash availability of an entrepreneur.
2) Equity Building
Entrepreneurs need equity to invest on their businesses. Pew research has shown loans can affect a budding entrepreneur’s net worth in the short and long term.
3) Debt Capacity
Debt financing is the primary source of financing of new companies. Student debt can affect negatively credit scores and reduce the amount of extra debt a person may incur.
Most new business owners, including high-tech entrepreneurs, rely heavily on personal assets and loans to get their companies started. Even the ones who use angel or venture capital later on. So the effects of student debt could be significant even among the startups heavily funded by external capital in later stages.
Student debt can be a heavy burden to budding entrepreneurs in more than one way. And when we discuss potential solutions to the issue, we need to be aware of the all ways in which student loans can impact people.
Student debt research is early and we remain open to ideas for expansion on the field.