Starting a small business when you have student debt

We recently published a report on student loan affordability, which discussed the potential impact of student debt on small business starts and entrepreneurship.

In the past few weeks, we’ve met with a number of young entrepreneurs and innovators working in the technology sector. We asked about the roadblocks they’ve experienced when trying to build new businesses. We heard that, for many, student debt has made it much harder to take risks and for these young graduates to bet on themselves and on their ideas. In addition, we’ve heard that it’s hard to attract talented employees willing to take a risk because they’re worried about their debt.

On average, for each new startup , the economy has added 5.3 new jobs over the past decade. Between 2007 and 2010, the number of startups fell by 23 percent, falling faster than at any time in the past two decades. If startups had formed at the pre-recession rate, we would have seen nearly half a million more new businesses created over the past five years.

Unfortunately, many recent graduates tell us they’ve put off their goal of starting a business. And student debt may be playing a role. Since the recession, the share of young graduates’ outstanding credit consumed by student loans has jumped by 14 percent . Others have found that young student loan borrowers now have lower credit scores than their peers with no student debt. This may make it more difficult for borrowers to qualify for small business loans.

We’ve received questions from consumers about what to consider if they have student debt and want to start a small business. We’ve uploaded some advice to Ask CFPB. Take a look.

I’m interested in starting a business, but I have student debt. What do I need to know?

If you have student debt, it may be harder to access business credit and to save enough cash to cover startup costs. Even if you are able to save enough to start a small business, you still have to keep up with your student loan payments, which divert cash away from your business. Consider the following:

• You may be able to lower your payment on your federal loans. The Small Business Administration’s Startup America initiative advises young entrepreneurs to lower their federal student loan payments by enrolling in Income-Based Repayment (IBR). Most private student loan borrowers do not have this option and may have a harder time making ends meet. If you have private student loans, you might consider refinancing your loans to lower your interest rate, though this option is not available for many borrowers.
• Be sure to make your payments on time. Student debt can hurt your credit score if you have struggled to make your monthly payments. Many lenders include personal credit history in the evaluation criteria for a new small business loan . This requirement may put new graduates with high student debt at a disadvantage – and may be a roadblock if you are an aspiring entrepreneur. But by repaying your student loans on time and in full each month, you can boost your credit profile.

By understanding the impact student debt can have on your credit and taking advantage of alternative payment options on your federal loans, you may be able to get closer to your goal of starting a small business.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To find out more information about the CFPB’s work for students and young Americans, visit consumerfinance.gov/students.