By Jennifer Weinhart, Policy Manager, Engine Advocacy & Foundation
Over 43 million borrowers hold student loan debt, including one in three adults between 18 and 29. These borrowers have an average balance of over $37,000, amounting to a total of over $1.6 trillion in federal student loan debt. Simultaneously, while new business creation has surged, particularly during the pandemic, the share of young adult entrepreneurs has stagnated. Launching and building a startup is not devoid of risk — some estimates suggest nine out of 10 total startups fail — and founders often struggle to acquire capital early on, with many unable to take a paycheck themselves. Without steady income, those who hold student debt often can’t pursue entrepreneurship.
According to one 2018 study, while roughly 60 percent of millennials self-identified as entrepreneurs, only 4 percent were actually self-employed. While in the mid-1990s, young people were responsible for launching 35 percent of startups, by 2014, that number dropped to just 18 percent. And in 2016, the Small Business Administration deemed millennials the least entrepreneurial generation.
Studies indicate that excessive student loan debt serves as a roadblock on the path to entrepreneurship for younger Americans. And the prospect of a failed startup — a common occurrence — may simply be too high a burden for entrepreneurs who already have significant personal debt. When all is said and done, student debt, like access to affordable health care or childcare, can ultimately determine whether a person has the privilege to pursue being an innovator, with many borrowers repaying their loans at least into their forties.
For would-be founders of color — especially Black women, who already face significant barriers in accessing the capital and resources they need to launch and grow a startup — student loan debt can be insurmountable. Studies indicate that Black women are “the most likely of any gender group to have student loans, with around one in four Black women having student debt,” and they graduate with the highest levels of debt. But Black women are also most severely shut out of the startup ecosystem — they receive less than half a percent of venture capital, have diminished access to credit and loans, and are more likely to rely on personal funds to launch a startup. Carrying student loan debt in addition to the already high barriers Black women founders face, may simply push entrepreneurship out of the realm of possibility.
Experts largely agree that the increase in student loan debt can be tied to a decline in entrepreneurship for debt holders. Not only are student debt-holders likely to be more reluctant to forgo a steady paycheck to pursue entrepreneurship, their loans often limit their means of accessing the capital needed to get a startup off the ground. Indeed, some borrowers have indicated that the presence of student loan debt precluded them from obtaining loans to launch and grow their startups. A limited number of startups receive venture capital but most rely on a combination of other sources, like self-funding, funds from friends and family, and personal or business loans — limits on just one of those alternative channels can stifle a new business. Others have pointed to student loan debt as a barrier to investing in organizations and bringing on new staff. This is particularly troubling when considering that most net new job creation is the result of new business formation.
While the Biden administration has taken some steps to ease the student loan burden for Americans — fixes to income-based repayment and student loan forgiveness programs, an interest-free pause on repayment for all federal debt holders amidst the pandemic, and the cancellation of debt for some attendees of predatory institutions — broader federal student loan forgiveness, supported by the President during his campaign, has yet to come to fruition. But, recent reports indicate some level of cancellation is imminent. While it is unclear what amount will ultimately be forgiven — in the past President Biden has indicated support for $10,000, while Democrats in Congress support $50,000 — or whether income caps will limit who can access the forgiveness programs, student loan relief on the part of the federal government could be a meaningful step that could boost new business formation. Policymakers could also examine proposals to direct loan forgiveness at entrepreneurs themselves — including capping payments and eventually providing forgiveness to those that launch or work for startups for a prescribed period of time who have a history of on-time repayment.
The overwhelming burden of student loan debt should not be an insurmountable barrier to entrepreneurship or stifle new innovation. Addressing this debt, and the environment that has allowed student debt to balloon, is critical to U.S. economic recovery and continued leadership in the innovation ecosystem.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
