Young Dreams, Derailed: Student Loan Debt is Scaring Entrepreneurs Away

Business.com / Strategy / Last Modified: February 22, 2017

With recent graduates carrying an average student loan balance of more than $35,000, many would-be entrepreneurs are scared off.

In recent years, young people in college have launched some of the world’ biggest brands, from Google to SnapChat.

With independence, access to technology and connections with professors in the industry, universities are breeding grounds for great ideas and incredible talent.

From developments in technology to aid programs in third world countries, young professionals have caused significant change.

However, with recent graduates carrying an average student loan balance over $35,000, many would-be entrepreneurs are scared off from trying to turn their innovative ideas into a business. 

At this year’s Clinton Global Initiative (CGI) America meeting, former President Bill Clinton highlighted the seriousness of the student loan issue.

Nearly three-quarters of the United States’ college graduates will deal with that debt for several years after they leave school, and their loans will impact their decisions on housing, marriage, and their careers.

This situation threatens the economic security of the country and the financial futures of the Millennial generation.

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The Student Loan Burden

The nearly $1 trillion in student loan debt prolonged the recession in the United States because it limited the housing market and kept people from starting businesses. With the housing market down over 70 percent from 2005, more and more graduates are living with their parents or renting apartments with roommates to make ends meet and put more money towards paying off their debt.

Not just a problem for those carrying balances, heavy student loan burdens the entire country and has serious consequences. In a June study of 500 student debtors, 30.60 percent of participants reported that they would give up sex if it meant no more student debt. And, 26.80 percent of participants reported that they would contract the Zika virus if it meant no more student debt. This study and infographic show the extent of the student loan crisis in the United States. 

Student debt hinders innovation, forcing graduates to take the best-paying jobs they can find quickly to start paying off their loans, eliminating their ability to start their own endeavors. Besides making their hefty monthly payments, potential entrepreneurs also have more difficulty securing loans for their business due to their debt; the loan balance can bring down their credit scores significantly, making a loan through a traditional bank impossible.

These factors combine to scare young professionals away from launching a startup. According to the Federal Reserve Bank of Philadelphia and Pennsylvania State, there is a clear economic link between increased student loan debt and entrepreneurship; the higher the debt, the fewer small businesses that are formed. Moreover, with fewer entrepreneurs, there is a trickle-down effect that impacts everything from jobs to social development.

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Entrepreneurs Make Our Country More Prosperous

Entrepreneurial ventures bring more money to the country. New technology and businesses can create new industries, reach untapped markets and end up paying more money in taxes to benefit public works and government spending. As startups succeed, higher earnings can lift a whole community up regarding economic prosperity.

Entrepreneurs Change Social Issues

Instead of using traditional methods, entrepreneurs by their very nature look for new ways of doing business. From finding new ways to filter water to developing novel forms of fuel, entrepreneurs are responsible for changing major issues.  

With fewer entrepreneurs, there are less new services and products and fewer solutions to ongoing problems, such as the energy crisis and global warming. With graduates forced to take on careers that pay the bills but don’t necessarily tap into their passions, we lose out on the ingenuity of this group of people and the developments that could have improved our daily lives.  

Entrepreneurs Are The Biggest Employers

Additionally, U.S. workers need entrepreneurs to earn their salaries. Small businesses are responsible for over half of the nation’s jobs and create nearly 70 percent of new positions. Without the growth of the small business sector, a large portion of the country’s workforce will be unemployed.

Corporate America has been downsizing, moving operations overseas for tax advantages and outsourcing production facilities to lower-cost countries, causing the loss of millions of jobs. We need substantial developments in small businesses to replace the positions lost and keep the economy stable.

Potential Solutions

Change is needed throughout the student loan system, for the benefit of students and our overall economy. College-educated adults with no student loan debt end up with seven times the average net worth of adults with loans. An education is an asset, but a costly one and school loans are limited by particular regulations.

Unlike other forms of debt, except in extreme circumstances, student loans are not eliminated in the case of bankruptcy. They also can’t be refinanced, except through working with private companies the only debt with this restriction.

While reforms to the system itself are a start, other experts recommend more aggressive measures to encourage entrepreneurs and develop startups. At the CGI America meeting, Rensselaer Polytechnic Institute president Shirley Ann Jackson advocates for incentives for small business launches.

Likening her idea to that of student loan forgiveness programs for public service workers, Jackson lobbies for entrepreneurs to be rewarded for their innovation with their loans forgiven. And, Hillary Clinton’s New College Compact is calling for more federal student loan refinancing options. If passed, the New College Compact would lower loan costs for student debtors. 

Allowing people to eliminate their debt while pursuing new business paths is a viable way to kickstart the economy and increase the number of small businesses operating in the United States.

A multi-pronged approach to the student loan issue is needed for our economy to grow. The current situation severely threatens our financial security and futures and needs comprehensive reform.

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The Bottom Line

The connection between student loan debt and decreased entrepreneurship has been established in many studies from research institutions across the country. This link has significant consequences for workers, consumers, government officials and society at large.

Nurturing innovation and new businesses are essential to the U.S. economy and low unemployment rates. Student loan debt continually keeps graduates from pursuing their passions and inhibits creativity. Substantial reform is needed to the student loan system to make college more affordable and help decrease current debt balances to encourage entrepreneurial endeavors.

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