The majority of employers in the United States are small businesses and startups. With national student loan debt surpassing $1.3 trillion, small business growth has slowed considerably. Entrepreneurs with great ideas are putting off launching a business — or dismissing the idea altogether — to get a job and get a handle on their debt. This issue has a significant negative effect on the economy. However, there are options available for would-be entrepreneurs to launch their business while managing their loans.
The Burden of Student Debt
The growth of small businesses slowed over the past decade, due to a significant increase in the amount of loans graduates face after leaving school. In a 2015 Gallup study, 63 percent of graduates left school with student loan debt. Nearly 20 percent reported delaying starting a business due to their loans. For graduates with more than $25,000 in loans, that percentage rose to over 25 percent. Put into real numbers, that means over 2 million graduates delayed launching a new business.
The Risk of Becoming an Entrepreneur
Student loans are the largest burden facing young professionals. According to the Wall Street Journal, 40 percent of Americans with federal loans are not making debt payments and are either in default or are in deferment or forbearance programs due to economic hardship.
For startups, income can be unstable at best, with severe fluctuations and periods of loss. With such unreliable prospects, many opt to work for others instead of launching their own business to secure a steady paycheck and end up sacrificing their great ideas.
Student Loan Repayment Alternatives
While launching a business instead of getting a job right out of school is riskier, it can be done without going into default. There are alternatives that will help you reduce your debt burden and monthly payments, making your loans more manageable and freeing up funds to help you handle your expenses:
Consolidation: If you have federal loans, they can be consolidated to reduce your monthly payments. While your interest rate is not usually affected, you can stretch your repayment term from the standard ten years to 25 years, cutting your payments down significantly.
Alternative Repayment Plans: Many people in default are not aware that they have repayment options. Federal borrowers can choose from the income-based repayment or ‘pay as you earn’ plans, which base your payments on a percentage of your discretionary income. If your income goes up, so do your payments, but if your income takes a hit, your payments go down too.
Refinancing: Refinancing your loans can reduce your interest rate, extend your repayment term and cut down on your monthly payments. Depending on the type of loan, you could be paying as much as six to eight percent interest. By refinancing with a private lender, you could bring that down to just two or three percent, saving you thousands of dollars over the term of your loan.
These options can all be ways to make your debt more manageable, but it’s important to remember that by extending your repayment term, you can end up paying a lot more in interest. While that might be a small price to pay for having your own successful business, it is something to take into consideration before putting your signature on anything. Make sure you compare multiple offers to get the most competitive interest rates and repayment terms.
Lifestyle Changes
There are also lifestyle changes you can make to reduce debt and increase your income, making launching a business more feasible:
Build Your Business on the Side: The great thing about startups is that they do not have to be ‘all or nothing’. You don’t have to quit your job right away to get your idea off the ground. You can start your business during your off-hours and weekends and rely on your full-time income until your startup gets on its feet.
Freelance: Similarly, you can launch your business but freelance or serve as a consultant on the side for extra income. That can help fill the gaps during slow times when your business is bringing in less money.
Launching a business is a huge step, and even with the best ideas, it can be a risk. But entrepreneurs are essential to the United States economy and being your own boss can be much more profitable and rewarding than working for someone else. Even if you have student loans, you can still create a small business successfully. By examining your repayment options, comparing lender offers and cutting down on your expenses, you can minimize risks and start your own company.