By Ben Kaufman and Mark Herbert | January 8, 2020
Small businesses are the engine of the American economy, accounting for 99.9 percent of all firms in the U.S. and over 65 percent of job growth since 2000. Ranging from cornerstone local restaurants to burgeoning technological ventures, these companies make an outsized contribution to the American economy as a whole and to communities nationwide. Moreover, these businesses are key drivers of economic inclusion. For example, the latest available data indicate that more than one million small businesses are run by people from minority backgrounds and that over 1.1 million are run by women.
Concerningly, the student debt crisis has spilled over into the small business community and entrepreneurship more generally. An emerging body of evidence suggests that student debt is a growing drag on the small business sector and on new business formation. This research suggests that addressing the student debt crisis will be a key step in promoting the resilience and vibrancy of the small business sector during and after the pandemic. As more than one third of small businesses across the country report that they may not survive beyond the next three months without assistance, the need for a lifeline to the small business community has never been more dire.
Here are a few ways that student debt crisis is holding back American small businesses:
- Researchers at the Federal Reserve Bank of Philadelphia found that an 8 percent increase in total student debt levels in a given county leads to 70 fewer new small businesses in that county. This reduction translates into a 14 percent decrease in the average number of small businesses per county nationwide. The authors attributed this effect to the difficulty student loan borrowers face in getting the loans they need to start a business.
- Scholars from Northeastern University and the University of South Florida found that the presence of student debt decreases entrepreneurs’ willingness to take risks such as investing in scaling up their businesses, as the consequences of failure are heightened for those with student debt. This pattern leads student loan borrowers’ ventures to be less profitable overall. In particular, among borrowers who started a company, the authors found that going from $0 to $10,000 in student loan debt is associated with a 42 percent decline in business income.
- In another paper, the same team of researchers from Northeastern and USF found that graduates from universities that replace student loans with grants in their financial aid policies are far more likely to engage in, find backing for, and succeed at entrepreneurial ventures, particularly in the technology space:
- Among universities that implement no-loan financial aid policies, the proportion of graduates who work as entrepreneurs is almost three times higher than average;
- Firms founded by graduates of universities with loan-free financial aid policies raise 190 percent more venture capital, on average, than other firms, and they tend to raise it from VC firms with relatively better reputations for selecting investments and creating value (measured as those VCs whose market share rose the most over a five year period); and
- After five years, firms founded by graduates who attended universities that eliminated student loans from their financial aid system had 132 percent higher sales and 105 percent higher employment levels than firms founded by graduates of other schools.
- Research conducted by Gallup and Purdue University indicates that 26 percent of graduates with no student debt have started their own business, compared to only 16 percent of those owing $40,000 or more in student debt.
- In another study from Gallup, researchers concluded that student debt led to two million fewer new businesses being formed between 2006 and 2015, with 19 percent of all student loan borrowers and 25 percent of borrowers with more than $25,000 in student loan debt reporting that they delayed starting a business because of this burden.
- In a survey from Young Invincibles and Small Business Majority, almost half of millennials with student loan debt who own or plan to own a business reported their student loan payments affected their ability to start a business. The survey found this debt also affected their ability to invest in their business or hire new employees.
- Medical practitioners report that student debt is holding back small private practices, especially those in rural areas that are necessary to serve America’s more remote communities. For example, a representative of the American Physical Therapy Association (APA) recently testified before Congress that the burden of student debt is preventing students from pursuing careers in physical therapy, especially “graduates who reflect the diverse patient population that we serve,” and that low-income areas are the most likely to see the consequences of diminished medical care. Moreover, even among those who pursue careers in medicine, student debt can stand in the way of medical professionals eventually opening their own practice. As the APA representative put it, “I have spoken to many new PT grads who dream of opening up their own small practice someday but fear that those dreams will not become reality, as taking on small-business loans in addition to their existing student debt is simply not possible.” This could add to the long list of ways that student debt affects rural communities and public health.
Local and national economic dynamism depend on the strength of our small businesses. The studies above underscore that addressing the student debt crisis is a critical first step to ensuring that small businesses across the nation can continue forming, growing, and building resilience.
Read more in our Research Roundup series, including how student loan debt affects rural communities and farmers and how student loan debt affects public health.
Ben Kaufman is a Research & Policy Analyst at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
Mark Herbert is Vice President, California for Small Business Majority, a national organization that empowers America’s entrepreneurs to build a thriving and inclusive economy. Mark oversees policy and outreach efforts across the state of California while also directing Small Business Majority’s work on responsible small business lending issues nationwide.