Approximately 50% of the American private sector is comprised of small businesses. But due to student loans, the American entrepreneurial spirit has suffered a hit and in 2016, CNN reported that US entrepreneurship has been at an all-time low for nearly 40 years.
According to a 2015 study done by Brent W. Ambrose, Larry Cordell, and Shuwei Ma, student loans can stop Americans from financing a startup and inadvertently hamper economic growth. The researchers say that potential business owners are encumbered by student loans that they longer have any way of borrowing more money. The student loan debt in the United States is now over $1.3 trillion.
Reliance on the Founder’s Personal Credit
During a Penn State News interview, Ambrose said, “Individuals need to pay special attention to the decisions they make and realize that incurring debt has consequences.” While other experts such as CNN’s Heather Long note that reasons such as the huge shift to national chains and too much government regulation also contribute to this decline, it is important to remember that small businesses rely on the founder’s credit.
Without the founder’s capacity to borrow more money, the business won’t materialize. In 2013, Forbes reported that only 16% of startups got their funding from banks, the rest had to use their own savings or borrowed from friends or family.
Refinancing Before Starting a Business
There is some good news. According to the Business Insider, refinancing your student loan is a good idea especially if the original interest rate is too high. In fact, a USA Today article also says that refinancing can bring major relief to borrowers. The biggest draw, according to the report, is how much a borrower can save by refinancing a loan. If the student loan carries 6.5% in interest rates or higher, it is better to refinance to get more favorable interest rates.
Brandon Turner, a real estate investor says that paying off debt should be a priority for those who want to start a business and the first step is to minimize cost of living. He adds that any debt that is eliminated is one less obligation that you need to think about. It also follows that if an entrepreneur gets rid of most of his or her debts, he or she will be in a much better position to start a business.
Solving the Problem
With over 7 million student loan borrowers in default (based on 2016 numbers), it is clear that the problem needs a long-term solution. The New York Times suggests that spreading payments over 25 years can solve the debt crisis. According to the Times, this is what they do in Sweden and they are getting paid back by borrowers.
It is also interesting to note that Swedish students borrow an average of $20,000 for living expenses, more than double the average undergraduate debt in America. By spreading out the payment period, student loan debt will be far less of a burden. Potential entrepreneurs with student debt will also have better chances of starting a company. And this might even solve the decades-long decline in the number of American startups.