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Recent Research: The Impact of Student Loans on Entrepreneurship

April 22, 2015

Throughout the United States, policymakers continuously call on entrepreneurs to be an important cog in the economic engine. One of the key barriers to entrepreneurship, however, has grown largely as a result of state policies: burdensome student loan debt.  In the United States, the total amount of student debt is estimated at $1.2 trillion, a record high, according to the Consumer Financial Protection Bureau. Writing for the Wall Street Journal, Purdue University President Mitch Daniels, who previously served as Indiana’s governor, discusses the many ways that persistent student loan debt is a long-term threat to the inventiveness and innovation that has long been dependent on solving the nation’s economic problems. Several recent analyses have pointed to some of the potential impacts that student loan debt may have on American entrepreneurship, though few states have explicitly tied student loan debt to their debates over innovation policy.  

In a recent study, two researchers from Northeastern University find a negative relationship between student loan debt, entrepreneurship, and entrepreneurial success. In The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship?, the authors use the Higher Education Amendments of 1992, which made federal Stafford loans more widely available, as an exogenous shock to student debt. In doing so, they find that a greater amount of student debt is negatively associated with the propensity to start a firm, and, conditional on starting up a firm, individuals who have more student debt have less profitable firms. The authors also find that both of these negative effects were stronger among younger cohorts, who have fewer savings and are more likely to still be paying off loans, and in high-tech industries.

In The Impact of Student Loan Debt on Small Business Formation, researchers from Penn State University and the Federal Reserve Bank of Philadelphia found a significant and economically meaningful negative correlation between changes in student loan debt and net formation of small businesses – those employing between one and four employees and dependent the most on personal debt. Based on the authors’ model, a one standard deviation increase in student debt reduces these small businesses by 25 percent on average in each county between 2000 and 2010.

The 2014 Gallup-Purdue Index Report, a study of more than 30,000 college graduates across the United States, finds that high student loan debt may inhibit entrepreneurship, particularly for those who graduated after 1990. Of those individuals surveyed who left school debt-free, 26 percent started at least one business. Among those with more than $40,000 in loan debt, however, only 16 percent had done so. Younger student loan borrowers already have lower credit scores and are less likely to enter both the housing and the auto markets. Now, it appears that the burden of debt also has an impact on the likelihood they start a business.

Joined together, these findings make important contributions to the literature on student loans and entrepreneurship. While these findings may make common sense, it is necessary to highlight that high-tech entrepreneurship, millennial retention, and small business formation are increasingly viewed as economic development tools, though each finds itself hindered by the pervasiveness of student loan debt.  Policymakers may fail to take into account the combination of factors that limit an individual’s entrepreneurial tendencies if they do not address, or at least attempt to mitigate, the harmful effects of crippling student loan debt.

As a policy prescription, student loan forgiveness to incentivize entrepreneurship has been used, though infrequently. In 2011, the President’s Jobs Council released recommendations to reduce student loan burdens and incentivize entrepreneurs, which were largely addressed by the Obama administration weeks later. In a blog post, then-U.S. Chief Technology Officer Aneesh Chopra suggested that new executive actions targeting student loan debt management would benefit entrepreneurs.

Rhode Island Gov. Gina Raimondo’s proposed budget for FY 2016 allocates $1.75 million to create the Wave Maker Fellowship program, offering up to four years of loan forgiveness for approximately 100 recent graduates pursuing careers and starting businesses in important industry sectors. New York Gov. Andrew Cuomo similarly called for a student loan forgiveness program that would cover two years of loan payments for graduates of New York State colleges who stay in the state, enroll in the federal Pay as You Earn program, and earn less than $50,000 per year. Several other states, such as Kentucky, Illinois, Texas, Missouri, and South Carolina, also offer programs for student loan forgiveness, though they are targeted toward difficult to fill professions such as teaching or nursing. 

Transcending party lines, student loan debt will continue to be a major factor impacting Americans without sound public policy intervention. On an individual level, student loan debt can be expensive, complicated, and difficult to discharge. On a macroeconomic scale, the impacts of these burdens could continue to hinder future economic growth. If policymakers are indeed focused on increasing entrepreneurship, it is important that they continue to focus on those regulations and barriers most negatively impacting entrepreneurs. As a result, the impacts of arduous student loan debt on entrepreneurship should continue to be explored and acted upon.


higher ed, entrepreneurship