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Student debt can ruin your dreams of being your own boss

CNBC logo CNBC 10/25/2018

a group of people standing on a sidewalk © Provided by CNBC LLC When Ashley Hardin graduated from Brooks Institute of Photography, a former arts college in California, she was saddled with more than $150,000 in student debt.

She tried to launch a photography business, but she couldn't afford all the equipment she needed, or the promotional materials and website expenses. Her monthly student loan bill was more than $1,000.

"There's a whole umbrella of things that have to be paid for," Hardin, 34, said. "I couldn't see any light at the end of the tunnel."

After five months, she abandoned her business. "I just had to work to make money to pay this loan back," she said.

Student debt can have a chilling effect on entrepreneurship, according to a scant but budding body of research.

People with student loans can have less money to invest in a new business and can find it harder to get financing from a bank. In addition, some would-be entrepreneurs may be hesitant to take on the risks of a new business when they have a monthly student loan bill to meet. After all, half of small businesses fail by their fifth year.

A person with $30,000 in student loans is 11 percent less likely to start a business than a person who graduated debt-free, according to calculations by Karthik Krishnan, an associate professor of finance at Northeastern University who researches student debt. Businesses started by people with student debt also don't grow as fast as those headed by people without it, Krishnan finds.

"It's going to be a big problem as we get to the next decade," Krishnan said. "We're going to see a gradual deterioration in outcomes in economic mobility and start-up activity."

Average debt at graduation is currently around $30,000, up from $10,000 in the early 1990s. At the same time, young entrepreneurship is declining. The share of new business owners between the ages of 20 and 34 was around 25 percent in 2016, down from 35 percent in 1996. Half of young adults who either already own a business or have plans to do so identified student debt as one of their main barriers, according to a recent study by the Young Invincibles, a student advocacy group.

Not long after he graduated college, Alec Stevens tried to open a gaming store in Kennewick, Washington. The space needed to be pretty big, he said, so he could hold events and fit plenty of tables for people to play on.

After researching his business, he knew he needed to borrow around $50,000 to get it off the ground. But bank after bank denied him a loan.

"They said because I had this giant student debt looming over me I was too risky," Stevens, 38, said. He owed around $30,000.

Fortunately, his parents agreed to lend him about $10,000, and he opened a smaller store in a quiet part of town. The store proved too small to succeed though, he said.

"I wasn't able to do large events, and people lost interest after awhile," he said. After a year, he didn't renew his business licence.

Small business owners can be especially hurt by the effects of student debt, according to a study by researchers at the Federal Reserve Bank of Philadelphia and Pennsylvania State.

As student debt outpaces credit card and auto debt, the number of businesses with one to four employees dropped by 14 percent between 2000 and 2010, the researchers found.

The consequences of this trend could reverberate throughout the economy, said Brent W. Ambrose, the Smeal Professor of risk management at Pennsylvania State University and a co-author of the study.

"A large percentage of employment in the United States comes from small businesses," Ambrose said. "If student debt is causing a reduction in the ability to create these new businesses, that could be a problem."

How to start a business with student debt

Often, new business owners make little or no money for themselves while they're working to get their venture off the ground, said Mark Kantrowitz, publisher of Therefore, they should see if they qualify for a deferment or forbearance, temporary postponements of their student loan payments. (Keep in mind, this might result in your debt growing due to interest accruing.)

"Entrepreneurs should also consider income-driven repayment plans, which base the monthly payment on your income, as opposed to the amount you owe," Kantrowitz said.

To raise money for your business, Kantrowitz recommended using crowdfunding platforms such as Kickstarter, Indiegogo or GoFundMe. You might also consider asking relatives for help, or pursuing angel investors or business accelerators, he added.

People who want to start a business should "live like a founder," said Noam Wasserman, the author of Life is a Startup. Find the discipline, he said, to keep your expenses low, save money and pay down your debt. He said one of his students lived on a friend's couch instead of renting an apartment to pay off her student debt.

Once your business is taking off, be sure to make at least the minimum payment every month on your student loans to avoid penalties and to protect your credit score, said Kimberly Palmer, personal finance expert at NerdWallet.

New business making life hectic? "You can set up the payment as an automatic draft from your bank account so you don't have to worry about missing it by mistake," Palmer said.

Nerdwallet and the Small Business Administration also have tips on how to start a business with student debt.

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