A new study shows that rising tuition and soaring rates of student loan debt are standing in the way of entrepreneurship.
Access to capital is vital for any business trying to get off the ground. Particularly for businesses that employ only a handful of people, personal debt can make or break them.
And now, there’s one more hurdle standing in the way of small businesses: rising student loan rates.
New research shows that small business creation is hurting in areas around the country where residents carry substantial student loan debt. Small business creation dropped 14 percent on average for every one standard deviation increase in student debt between 2000 and 2010, according to an updated version of a 2014 study, The Impact of Student Loan Debt on Small Business Formation, Phys.org reported. Personal debt incurred early in an entrepreneur’s life restricts their ability to take on future debt, which has implications on small business growth, the study shows.
Researchers found that the correlation between student debt and business creation was most prevalent in the smallest of small businesses, as those owners are more likely to rely on personal credit, Phys.org reported. Meanwhile, student loan debt had an insignificant impact on large business creation over the same time period.
Unlike other forms of debt, student loan debt cannot be discharged through bankruptcy. Students who take out loans early in life could be strapped with debt indefinitely and unable to take out enough loans to finance new businesses. This is especially true for small businesses where owners often take on personal liability in business financing.
This has the potential to have a significant impact on the broader economy, researchers said, citing Small Business Association data showing that small businesses make up half of the private sector, 99 percent of all businesses and account for nearly 60 percent of jobs created in the private sector.
Student loan debt increased considerably during the financial crisis, the report showed. It tripled from 2004 to 2012, reaching $1 trillion, with the average graduate leaving school with $24,437 in outstanding student loan debt, according to the 2014 study.
Are you in the process of applying for a loan for your small business? Read NFIB’s 2015 Small Business Loan E-Book to learn how to get the capital your small business needs.
