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Student Loan Debt Hurts Small Business, Too

The numbers for student loan debt are truly staggering. Approximately 37 million Americans carry $1 trillion in educational debt according to the Federal Reserve Bank of New York. The under 30 set is the most heavily burdened, but the 30 to 40 cohort is badly in the hole, as well. The average debt of a recent college graduate is $24,000. That number doesn’t touch the scale of the problem, though.  Graduate students borrow one third of all federal direct loan funds. In 2012, the typical law school graduate finished with an eye-popping $128,125 debt.

The debt weighs on the whole economy, but it causes particular problems for small businesses. Entrepreneurs likely have as many loans as anyone else. They can find themselves struggling to invest in the business.  Customers who feel strapped are hesitant to buy and employees may be in a state of perpetual job search.

Debt Can Hamper Business Investment

Startups must invest capital to develop ideas and market products. Young entrepreneurs can feel cut off at the knees as they have to take cash out of the business to make student loan payments. However, the federal Income-Based Repayment Plan can offer some relief in the form of reduced payments for those who qualify.

Business credit is often tied, at least in the early years, to personal credit, so it is important to make student loan payments a priority.  Even well managed student loan debt may affect eligibility for business loans though, so it is important to begin to build a separate financial identity for your enterprise as early as possible.

The first steps are fairly simple:

  • Get a business phone number,
  • Apply for a tax identification number (EIN)
  • Set up a separate checking account for business bills.
  • Structure your business in some form other than a sole proprietorship or traditional partnership, and
  • Develop a professional business plan to show to lenders.

If you manage your personal finances carefully and establish your business as a separate entity, your student loans may have come to have less importance to your company.

Student Debt Shapes Consumer Behavior

The impact of educational debt on your customers will vary quite a bit with what you are selling and where your business is located. Sales of luxury items and basic necessities are probably less affected than everything in the middle.  Services and goods may also be affected differently.  Debt-conscious consumers may scrimp on services first, buying the widget, but passing on the extended warranty.  Businesses that market both goods and services may want to take creative marketing approaches to this and other of buying behaviors.

Student Debt Shapes Employee Behavior

Particularly in some areas of the country like the New York and DC metropolitan areas, private employers may have difficulty competing with the public sector. Under the Public Service Loan Forgiveness Program, highly educated, but heavily-indebted students who go to work for public employers may have student loans wiped clean after 10 years of repayment. Some private employers may be able to even the playing field with higher salaries, but small businesses may not. Trying to compensate with company culture may not do it for this group of employees.

Employers should also expect heavily indebted employees to be risk averse. In other times, that might have meant staying with a steady employer for the long haul. Now, it’s just as likely that the employee never stops looking for a job.  An increasingly valuable employee with two or three years of experience and a decent looking resume may be very hard to hold on to. Time to discuss a raise?

Employers may be able to build recruiting programs and foster loyalty with paid internship programs, particularly for graduate and professional students. On a grand scale, this might actually increase the pool of students willing to think about employers who can’t pay top dollar because the students will have taken on less debt.

We may have only just begun to appreciate the economic impact of student loan debt.  Students feel it first, of course, but small businesses are not far behind.  Entrepreneurs must manage their own educational debt to continue to build and invest.  At the same time, they may have to be creative in anticipating the effect student loan debt will have on customers, clients and employees.

Anne Wallace, Esq.

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Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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