Startups

Student Debt Puts Young Entrepreneurs on Hold


Student Debt Puts Young Entrepreneurs on Hold

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Dr. Steve Sherick wants to build out the emergency-care business he started two years ago, but the $300,000 in student loans he and his wife carry makes it difficult. The 36-year-old physician’s team of seven doctors works under contract at a local hospital in Trinidad, Colo., about 200 miles south of Denver. Sherick would like to hire a full-time office administrator and offer more competitive salaries to entice doctors to work in the rural community. “It deters an entrepreneurial spirit when you already start four steps behind the starting line,” he says. “The student debt increases the risk for an entrepreneur like me and makes it harder to expand a new business, get loans, and hire new people.”

The $1 trillion in educational loans is dampening the entrepreneurial drive of U.S. college graduates. In a recent survey of 9,500 debtors by Young Invincibles, a youth advocacy group, almost 23 percent said they had put off starting a business because of monthly student debt payments. Data compiled by the Small Business Administration show that while self-employment among those 65 and older increased 24 percent in 2010 compared with 2005, it fell 19 percent among individuals 25 and under in the same period. “With more student debt and stricter bank lending, it really hinders the ability of students to take risks, start a company,” says Dane Stangler, director of research and policy at the Kauffman Foundation, an organization dedicated to supporting entrepreneurship.

The share of 25-year-olds with student debt increased to 43 percent last year from 25 percent in 2003, according to the Federal Reserve Bank of New York. At the same time, the average education loan balance among that age group grew by 91 percent, to $20,326 from $10,649. The debt burden is suppressing risk-taking and hindering the formation of new businesses, says a May 8 report from the Consumer Financial Protection Bureau (CFPB). “For many young entrepreneurs, it’s critical to invest capital to develop ideas, market products, and hire employees,” says the agency’s report. “Student debt burdens require these individuals to divert cash away from their businesses so they can make monthly student loan payments.”

Katie VanDyk, 26, started an online business in 2011 for sorority recruitment with her younger brother Wes. Yet because of the $180,000 in student loans she accumulated, the Tulane University Law School grad took a job as a lawyer in Austin rather than devote herself to her startup. “It’s intimidating, because it’s going to be about 20 years before I pay it off,” she says.

While a bankruptcy can clear away housing and credit-card debt, there’s no forgiveness on student loans. Since a 2005 change in bankruptcy laws, student debt can’t be discharged, barring reasons such as severe and permanent disability. Lenders can garnish income tax refunds, wages, and even Social Security checks to get repayment. “The consequences of not meeting those loan obligations are very severe,” says Rohit Chopra, the CFPB’s student loan ombudsman. “Once they become late or delinquent or in default, that makes it more challenging for them to access personal credit in order to build their businesses.”

In an April letter to the CFPB, the Main Street Alliance, an organization with some 1,200 small business owners, argued that rising levels of debt are also causing graduates to walk away from jobs at small companies. “Student debt burdens may cause valued employees to leave the ‘family’ atmosphere of a small business by seeking opportunities with larger businesses with more lucrative benefits,” the group wrote.

Sherick says that’s an issue he’s encountered in his own business. “Because of student loans, doctors want to cluster around the urban area where they can make more money,” the Colorado physician says. “It’s hard for me to pay them more.”

The bottom line: A record $1 trillion in student debt is dampening risk-taking among graduates, leading to the creation of fewer new companies.

Louis is a reporter for Bloomberg News in Washington.

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