Is Student Debt Hindering Entrepreneurship?

Student loan debt has become a very salient issue in the US political arena and is at the forefront of the 2016 presidential election. This issue resonates with the public not only because of the rise in tuition rates but also due to the recent spike in student loan delinquencies. Average tuition at public colleges today is more than three times higher than in the 1980s. Student loan debt has increased from $260 million in 2004 to about $1,200 billion in 2015, while student loan delinquency of 90+ days has increased from 6.3 to 11.6 percent during the same period. These trends have raised concerns about the socioeconomic implications of student loan debt and its long-term impact on the American economy.

A new study by Karthik Krishnan and Pinshuo Wang explores the relationship between total household student debt and starting a business. They analyze data from 1992 to 2013 from the Federal Reserve’s triennial Survey of Consumer Finances (SCF). The paper examines heads of households between 18 and 50 years old with 13+ years of education. The researchers examine several models with controls for the year of survey and respondents’ characteristics, including gender and higher education attainment (i.e., four-year college degree or graduate degree).

The authors test the relationship between student loan debt and starting a business. They find a statistically significant negative association between the two variables. In particular, a change in student debt from $0 to about $35,000 decreases entrepreneurship by three percentage points. The results also show that males and more highly educated people are more likely to start a business.

The study also tested if the effects of student debt go beyond entrepreneurship rates to outcomes for business owners. The paper examines the subsample of entrepreneur respondents to analyze their business performance in terms of income and employment. The researchers claim that higher student debt is negatively associated with entrepreneurial business income. In particular, for every one percent increase in student loans, business income decreases by 0.146 percent. This corresponds to an annual $94 reduction in the median firm’s income.

The researchers also find that 23 to 27 year olds who have student debt are likely to have smaller ventures than business owners in older age groups. This age group also registers a much greater negative association between student debt and business income. In fact, the impact of student debt on business income is more than twice as strong in this age group as for the general population, representing a $234 decrease in the median firm’s income.

There is also evidence of a negative association between student debt and business employment. As in the case of income, the results are stronger for younger people, although the relationship is statistically weaker.

As this research suggests, student debt hinders entrepreneurship and can reduce income for those who do manage to start a business. Since entrepreneurship is considered an essential element of economic vitality and employment growth in the United States, this study highlights the importance of exploring solutions to the student debt crisis.

Article Source: Krishnan, Karthik, and Pinshuo Wang. “The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship?” Northeastern University D’Amore-McKim School of Business Research Paper, 2015.

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