By Megan Totka
Small businesses have long been one of the cornerstones of the American economy, but new research shows that this foundation may be crumbling under the weight of student debt. Politicians and social commentators have long observed the potential harm of this debt, but the effects on small business creation are immediate and could pose imminent danger to our economy.
The Problem with Student Debt
The student debt crisis is no secret: from 2004 to 2012, the amount owed tripled to $1 trillion, and it’s only continuing to rise. This number not only has the potential to financially cripple an entire generation of Americans, but harm other aspects of our economy. Fewer graduates are purchasing new cars or homes, and they’re less likely to take on the risk of forming their own small businesses.
Conducted by researchers at Pennsylvania State University and the Federal Reserve Bank of Philadelphia, “The Impact of Student Loan Debt on Small Business Formation” closely examined areas of the country with high student debt and the rate of small business creation in those areas. The data shows that between 2000 and 2010, a standard deviation increase in student debt reduced the founding of small businesses by 14 percent.
As more and more college graduates enter the workforce saddled with tens of thousands of dollars in debt, the future of small business is increasingly threatened. Not only are the finances of potential entrepreneurs tied up by student loan payments, but they’re also unable to borrow money to start their own business. Even if obtaining a loan weren’t an issue, these graduates are less likely to take on the risk and uncertainty of entrepreneurship.
The Future of Small Business
This crisis is becoming more than just a problem for new grads. It’s putting a long-term drag on the American economy, and has the potential to impact everything from national spending to small business creation. Fortunately, politicians and policy makers are becoming aware of the nationwide problem of student debt, and it’s possible that the problem will be addressed before the consequences are fully realized.
In the meantime, current entrepreneurs have the opportunity to mentor hopeful college grads with insightful advice into the founding process. Whether they choose to recommend loan consolidation or a long-term structured savings plan to account for the ebbs and flows that come with business ownership, experienced entrepreneurs have a lot to offer younger generations.
Overcoming the student debt crisis doesn’t simply fall on the shoulders of recent college graduates. The American people as a whole must find creative solutions to this problem, whether it’s a nationwide change in policy or a support system among entrepreneurs to encourage growth wherever possible.
Megan Totka is the chief editor for ChamberofCommerce.com which helps small businesses grow their business on the web and facilitates connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide. She specializes on the topic of small business tips and resources and business news. Contact Megan at megan@chamberofcommerce.com and follow her at @MeganTotka.
