Is Student Debt Crushing Millennial Entrepreneurship?

Locavesting Staff | January 27, 2016


Mention the words entrepreneur or founder, and images of ambitious, be-hoodied youth might arise. Thanks to Silicon Valley, youth and entrepreneurship are intertwined in the popular imagination.

But the reality is starkly different. Millennials lag behind older age groups in starting and running their own businesses. And a new study suggests that student debt loads and other financial concerns are holding back many young would-be entrepreneurs.

A survey of 800 Millennial voters (age 18 to 34) found that the Millennial generation is indeed entrepreneurially minded: a majority (51%) of respondents own a business, are planning to start one or would like to someday.

Almost two-thirds of respondents have taken out student loans, and about half are still paying them off. And those payments are crushing Millennial ambition. Of those that that currently own or have plans to own a business, roughly half say their student loan payments have impacted their ability to start a business. The number was only slightly lower among those that would like to open a business someday but have no current plans.

In addition, 75% of Millennials with who own or want to own a business say the lack of an employer-sponsored retirement plan is a barrier to entrepreneurship. More than a third say it is a serious concern.

Millennial chart
Source: Small Business Majority, Young Invincibles

The nationwide survey, conducted for the advocacy groups Small Business Majority and Young Invincibles, shines a light on the growing problem of student debt.

Nearly 70% of U.S. college graduates leave school with debt. In total, 40 million people owe $1.2 trillion in student loans. Economists have noted that the debt load is preventing young professionals from making big purchases such as homes and cars that drive economic growth. The newly released survey adds fuel to the fire, suggesting that the debt obligations are also stifling entrepreneurship and small business growth. According to the Kauffman Foundation, Millennials have the lowest rate of new venture creation, which is led by entrepreneurs age 45 and over.millen 3

Over the last decade, the average debt load for college graduates has risen more than twice the rate of inflation. While much attention has focused on the skyrocketing tuition at top tier universities, graduates of less selective higher education programs, such as for-profit and community colleges, are most likely to be struggling with student debt. Though their debt loads are smaller, they tend to earn less after graduation and fall behind.

Researchers at Stanford University and the Treasury Department estimate that 75% of the increase in student loan defaults between 2004 and 2011 were driven by a surge in the number of borrowers at for-profit colleges, which tend to attract low income students.

At Risk Borrowers

Borrowers at for-profit colleges and community colleges tend to earn lower salaries—a median of about $22,000 for those exiting school in 2010.  In contrast, graduates with $100,000 in student loan debt, a small minority of borrowers, earn an average $80,000 a year after graduation, according to The Bureau of Labor Statistics.

As a New York Times article recently put it, student debt “is a major financial obstacle for people who already face barriers to opportunity.”

Online “peer-to-peer” lenders such as Common Bond and SoFi allow young professionals to refinance their student loan debt with lower cost loans. However, they tend to focus on graduates of top tier schools and MBA programs with good earning prospects.

The Young Invincibles and Small Business Majority advocate the following solutions:

– Allow borrowers to refinance their student loans. Unlike mortgages and other loans, student loans cannot be refinanced (outside of peer-to-peer lenders). Many borrowers are currently paying higher than market rates.

– Encourage income-based repayment plans that rise or fall with a borrower’s income.

– An increase in Pell Grant funding and increased investment by states in higher education.

In addition, SBM highlighted the need for easy-to-use retirement accounts for small business owners.


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