Easing Student Loan Burdens for Entrepreneurs

Posted by: John Tozzi on October 26, 2011

With student debt loads haunting college grads and jobless joining street protests, President Obama yesterday announced plans to ease student loan burdens by capping payments at 10 percent of what borrowers earn. On top of helping young people in lower wage jobs, the White House hopes the program will aid aspiring entrepreneurs whose student debts might otherwise discourage them from starting businesses.

The White House is building on the existing income-based repayment program that limits loan payments for low-earners to 15 percent of their income, and forgives all debts after 25 years. Starting next year, the cap will be lowered to 10 percent of income (a change that was already slated to happen in 2014). The payment timeline will also be shortened to 20 years, after which remaining debts will be forgiven. The White House estimates the change will lower payments for 1.6 million borrowers.

Coordinated with Obama’s announcement, the Young Entrepreneur Council (a nonprofit membership group) is unveiling a $10 million “Gen Y Fund” that will invest up to $250,000 in startups and cover founders’ federal student loan payments for up to three years. The group is also pushing for legislation that would expand loan deferments and forgiveness specifically for entrepreneurs.

The theory that student debt holds back young entrepreneurs has gained enough traction that venture capitalist Peter Thiel is actually paying would-be founders to drop out of college. I haven’t found any hard data on how educational debt actually affects people’s decisions on whether or not to start a business. But college tuition is rising twice as fast as inflation, and by some estimates Americans now have more student debt than credit card debt. There’s a lot of teeth-gnashing over how many top graduates (especially in math and science) go to Wall Street. These efforts to lower loan payments may make some of them more likely to start companies instead.

Reader Comments

JD

October 26, 2011 12:00 PM

UNBELIVABLE........Why didn't these people with college debt start out at community college? So because they didn't have the forethought to start somewhere that they could afford we'll forgive their debt in 20 years? No wonder this country is going broke. We also forgive dumb folks for getting into a house they couldn't afford in the first place and call it preditory lending, what happened to understanding what you were getting into before getting into it.......

Tell Fell

October 26, 2011 12:01 PM

Ok - Sounds good, but what's the catch? My loan origination was in 1997 and I consolidated in 2006. What is the end point (20 years to forgiveness, 1997 or 2006? Seeing that I "went back to school" to get a Master and I am now 62, it might not matter, except for my heirs.

feudi

October 26, 2011 12:03 PM

On July 1, 2012, the interest rates on federal student loans DOUBLE from 3.4% to 6.8%. If you thought student loans were bad now, you ain't seen nothing yet! A student who borrows $50K after July 1, will pay out $9,874 MORE in interest on a ten year loan. No mention of this fact in the article. Please run a follow up on how Wall Street banks get to borrow billions from the Fed at zero to 1% while our students, the fruits of our nation get raked for 6.8%! How ya like dem apples?

Harry Kuheim

October 26, 2011 12:06 PM

How about a cap on what they can borrow? Professors who never worked in the real world are selling students "Blue Sky" and lies. You can't borrow $50,000 for any Social Science, Liberal Arts, or B.A. degree...they simply aren't worth it.

GotDebt

October 26, 2011 12:17 PM

Forget forgiveness. What would work best without the Feds losing any money is to allow us to refinance our consolidated loans at lower rates consistent with mortgage rates. I consolidated my 8/10% int rate loans to 7.65%. Had to. But I can never consolidate them ever again nor refinance them. The Feds guarantee my loan, shouldn't that allow me to get a lower rate because there is no risk for the lender?

Many of us professionals have over $100k in debt for our advanced degrees. Economics aside of taking on that much debt, just let reduce our interest rates. I will pay my loans. But a 2 point reduction will give me over $200 a month in relief. Or to use to stimulate the economy.

Vic P

October 26, 2011 12:45 PM

This is a great move to help young entrepreneurs. They can take more risk when young instead of fall into what most folks do - working for someone else.

Private Educational institutions have so much cash, they are amoung the top investors for Angel & Venture funds. So any response from those folks should be read with grain of salt. You can also see the tuition revenue to VC funding.

Alexis Kasperavicius

October 26, 2011 1:09 PM

So now there is a disincentive to work much and/or game the system until 20 years past your graduation date - as all debts will be forgiven. Why work? Brilliant.

BallAndChain

October 29, 2011 3:20 PM

I completely agree with GotDebt. We need modifications on interest rates! I don't have a problem paying the principle on my loans, after all I knowingly chose to borrow that money. But, I am amassing $12K per year in interest alone.

I'm not sure what Feudi is referring to re: fed loan interest rates doubling next summer. All my fed loans originating since 2007 are at the 6.8% rate. They were all below 5% in the early 2000s. My private loans are at 8.5%.

I must mention that I used savings to pay for my first 1 1/2 yrs of graduate school. This is a second career for me. I am not a 20-something with no sense. I did all the appropriate risk assessments before leaving my safe and comfy 1st career to start over. Everything in the spreadsheet showed it was a good decision to change careers. Only problem is that I did not account for a historic recession (caused by risky actions of financial institutions and deregulation).

Aubrey

November 7, 2011 4:35 PM

To JD - That is not necessarily all true. I started out at a community college then transfered to a state university after I received my associates degree in 2007. It saved me money, but I still have $24,000+ in student loan debt which is MUCH more than any credit card debt I have ever had.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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