We love hearing rags to riches stories about undergraduates starting businesses which go on to change the world. Microsoft, after all, was famously started by Bill Gates while he was still in school and Facebook was launched by Mark Zuckerberg when he was at Harvard. These two well-known stories speak to the youthful entrepreneurial energy that has helped young people from each generation launch businesses either right out of school or soon after.
Sometimes these businesses come directly out of some aspect of their coursework or research, but other times students just get the entrepreneurial bug and a great idea and take it forward. But while Zuckerberg and Gates achieve astronomical success with their ventures, not all young entrepreneurs start companies that take off. In fact, as many as 90% of technology startups fail, and though that figure is lower in other fields, the odds still aren’t great. Even founders of companies that are successful struggle since it can sometimes take a while to become profitable. During these initial lean times, young entrepreneurs often don’t have money coming in or, if they do, it’s often not enough to start making their student loan payments once their grace periods end six months after they graduate.
The Struggle to Repay
Given that current graduates are leaving school with over $28,000 in debt, those student loan payments are not insignificant. The looming specter of these loans cannot be ignored by young people when they’re thinking about whether to launch a business. In fact, student loans are one of the cause of many students abandoning or postponing their entrepreneurial dreams.
After all, starting a business is expensive, time consuming, and has a low likelihood of working out. Add into the mix the fear that they could end up ruining their credit and defaulting on their student loans while trying to start their company and that is likely more stress than the typical 20-something can handle. These would be entrepreneurs often end up taking jobs at other companies and hoping to someday be able to pursue their entrepreneurial dreams.
Even if a young entrepreneur does take the leap and starts their business, student loans might thwart them in other ways. For example, it could make it much more difficult for them to hire employees since prospective employees might also have student loans to repay and might prefer the certainty of a corporate job over the prospect of working at a startup with low wages and stock options.
It’s Having an Impact on Business
Small businesses are the backbone of our economy. In fact, the Small Business Administration, found that small businesses make up 99.7% of employers and create 64 percent of new jobs.
According to a report by Young Invincibles, young adults used to be the biggest group of new entrepreneurs and now, with student debt increasing, they’re now the smallest. The report by Young Invincibles found that millennials represent just 23% of entrepreneurs, but they used to represent around 51%.
These smaller numbers aren’t because millennials aren’t interested in business ownership either. In fact, 51% either own or want to own a business. But student debt is causing those business owners a significant amount of stress with 46% reporting high or very high stress levels because of it. For those who don’t yet own a business, student debt is likely playing a role.
What Can Be Done?
Millennial entrepreneurs need to be encouraged and that means making sure that student debt doesn’t impede their dreams. Allowing entrepreneurs to defer their student loans for a certain number of years in order to give them time to get their businesses off the ground is one idea that could be particularly useful. This deferment could also apply to the first employees at any startup which would help ensure that startups can hire employees and grow.
One of the more popular ideas is to implement a federal program for student loan refinancing and consolidation. This is a big idea among some politicians, but overall, it isn't too close to realization. The government offers a federal consolidation loan program, but it does not come with the same benefits as a standard refinance, meaning a reduced interest rate. Currently, the only student consolidation loans that generate savings are offered by private banks and lenders.
Another suggestion is that the government could forgive the student loans of entrepreneurs who create lasting jobs. This would encourage more students and millennials to focus on creating jobs for other Americans by starting businesses.
If we want to encourage young people to start companies and create jobs again, then it’s critical that we look at what policies can be put in place to create the right ecosystem for youth entrepreneurship. If student loan debt is currently a big deterrent, then we must find ways to ensure that student loans don’t keep young people from starting companies.