Is Student Loan Debt Suffocating American Entrepreneurs?

Published

August 5, 2015

Christine DiGangi is the former Deputy Managing Editor - Engagement for Credit.com and covered a variety of personal finance topics. Her writing has been featured on USA Today, MSN, Yahoo! Finance and The New York Times International Weekly, among other outlets.

Small businesses make up about 99% of all U.S. businesses, but even as crucial as they are to the economy, they’re facing a major roadblock: student loan debt.

Rising student loan debt correlates to a decline in formation of small businesses, according to a study from the Federal Reserve Bank of Philadelphia. This is particularly a problem for the smallest of small businesses — those with one to four employees, perhaps those just getting started, aka startups — according to the research. In counties where education debt increased 2.7% over the course of a decade, there was a 17% decline in new firms with four or fewer employees.

Here’s how the researchers break down the problem: To start a small business, you need money. Unless you have a ton of cash on hand, that money will likely have to be borrowed, either in the form of credit cards, personal loans or business loans. To get that capital, someone starting a business needs to have the capacity to take on the debt, and if that person happens to be tens of thousands of dollars in student loan debt, that doesn’t leave a lot of room to take out the loans necessary to start the enterprise.

“We find a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for those firms with one to four employees,” the researchers wrote. “This is important because these small businesses depend on personal debt the most to finance new businesses.”

Considering that college graduates are taking on increasingly more education debt as a means to earn their degrees doesn’t paint a pretty picture for hopeful entrepreneurs. It suggests the narrowing path toward small-business ownership is going to be available to the small (and seemingly shrinking) group of grads who graduate without debt — a group that is statistically dominated by white students from high-income families.

One way to overcome that roadblock is to focus on eliminating your student loan debt, which can have the added benefit of improving your credit. As you pay down debt, you’re establishing a good credit history of on-time loan payments (the most important aspect of your credit scores), not to mention decreasing your debt load. Even if you’re not thinking of starting a small business in the near future, your student loan debt can have a significant impact on other aspects of your life — for instance, your ability to buy a home — which is why you should prioritize paying off those loans. You can see how your student loans and other debts affect your credit standing by getting your free credit report summary every 30 days on Credit.com.