Student Debt & Small Business Growth

About

Rising student debt[1] may be stifling small business growth[2].Researchers at the University of Pennsylvania have discovered that start-ups and small businesses account for approximately 60% of net employment activity in the United States. According to a Gallup poll conducted in February 2015, one of the biggest hurdles these companies and new entrepreneurs face, is identifying and accessing the capital to finance their ventures. Following the financial crisis of 2008, it's no surprise that the top funding source for new business remains the personal savings accounts of founders.[3] Personal debt therefore, becomes an integral component of the financing equation in starting a small business. The strong negative correlation found in the Pennsylvania study cites student debt as a possible contributor to declining small business growth[4].

Recent Trends

A report from the Kauffman foundation shows the number of entrepreneurs ages 20-34 as having decreased from 34.3% in 1996 to 24.7% in 2014[5].This translates to an overall decrease of over 40,000 entrepreneurs. Additionally, a gallup poll conducted in October of 2015[6], found that as many as two million students cited loan debt as the principle reason they’d forgone or delayed plans to start a business. After the 2008 financial crisis, firm deaths had significantly exceeded firm births as calculated by the US census bureau. This phenomenon had gradually reversed itself in 2011, but has continued to miss the net average of 120,000 firm births experienced during the late 90's and early 2000's. Researchers speculate that fulfillment of a quarter of the entrepreneurial plans of the two million students’ pursuits would have been enough to return the 120,000 firm birth surplus.The study conducted by the University of Pennsylvania is the first to explore the relationship between student debt and small business growth. Analysis from the models created in the study claim that an increase of one standard deviation in student debt, reduces small business formation for businesses with 1-4 employees by as much as 14%.