Saddled with $40,000 in college loans, Catherine Berendsohn, 29, struggled to get a web design business off the ground after graduating from Florida State University in 2010. Ms. Berendsohn, an artist-entrepreneur, wanted to rent a storefront and start a roving studio in Monterey, Calif. Her student loans, however, prevented her from getting the money she needed.
As she tried to expand her business, Ms. Berendsohn was denied a personal credit card. Her college loan payment was $400 a month at the time. She took on a website project and began to accept other clients in Carmel Valley Village, Calif. But then she lost a commission for a local mural project. Unable to continue to pay her monthly expenses, she shut down her business after three months and moved back home to Miami.
Because of the corrosive impact of student debt on start-ups, millennials seem to be the new lost generation of entrepreneurs.
Although it is difficult to pin down a direct relationship between college loans and entrepreneurial activity, the weight of student debt appears to be deterring some would-be business owners.
Arnobio Morelix, a senior research analyst with the Kaufmann Foundation, co-wrote a study with E. J. Reedy that found that the rise in student debt in recent years coincided with a decline in start-ups.
The study found that fewer young people were entering the world of entrepreneurship. The share of new entrepreneurs in the 20- to 34-year-old age group fell to 25 percent in 2014, from nearly 35 percent in 1996.
Total student loans rose from around $510 billion in 2007 to more than $1.3 trillion today. Despite an uptick in recent years, “overall start-up activity for adults under 35 years of age has been on the decline” since 1996, Mr. Morelix found.
“Young adults, who used to be the largest age group involved in new companies in 1996,” Mr. Morelix and Mr. Reedy wrote, “are now among the smallest demographic group.”
Many young entrepreneurs are unlikely to go to venture capital firms or business incubators, preferring to “bootstrap” — finance their companies with their own money or funds from friends and family members. But being in debt for student loans makes self-financing that much tougher.
Even graduates who have begun promising start-ups have found that securing financing when carrying student loans was brutally difficult.
Austin Dean, 28, based in Grand Rapids, Mich., started his first business repairing computers in 2007 while he was a student at Grand Valley State. He later had to it shut down after having cash-flow problems.
A second business, started in 2012 while he was pursuing an M.B.A., focused on corporate event hosting. But his $40,000 of college loan debt for his undergraduate degree forced him to make some sacrifices along the way, including eating cheap meals.
“Every month the question was, ‘Do I have enough to make my student loan payment?’” Mr. Dean said. “The debt is always there, drowning you. Could I have turned around the first business or grown the second business? Personal debt always comes first.”
The event business was later bought out by a partner. Now, he is on his third company, called Collective Metrics, which aggregates and measures the effectiveness of community projects.
“If I didn’t have student loan payments, I would absolutely put that cash into my business,” Mr. Dean said. “My student loan payments are $550 a month. Right now, we operate on a bare-bones model, just enough to get by and keep things running.” The $24,500 balance remaining on his loan will take him another four years to pay off, he says.
The issue may begin long before would-be entrepreneurs are even thinking about life after college. Many are in high school when they start to borrow and are not aware of how student debt might affect their finances later.
More than half of students did not bother to calculate their postgraduate loan repayments, according to a report by the Global Financial Literacy Excellence Center at George Washington University, using data from the Finra Investor Education Foundation’s 2015 National Financial Capability Study.
According to a new study by NerdWallet, a financial tool website, nearly half of undergraduate students say that they could have borrowed less and still have afforded their educations. “On average, they said they borrowed $11,597 more than they needed for undergraduate study,” the NerdWallet report said.
Still, there are options for budding entrepreneurs facing credit challenges. Crowdfunding sites like Indiegogo.com and GoFundMe.com don’t ask for credit reports. Nor is there much, if any, paperwork. Sometimes, simple business concepts can attract thousands of dollars, although getting a lot more than that requires a strong promotional campaign that gets a lot of attention.
So-called angel investors can be found through city-based business incubators or sites like funded.com.
It’s possible, too, to consolidate student loans and make lower payments. The government has nine repayment options. For example, a borrower whose income drops postgraduation — or is too low to make payments — may qualify for an income-based repayment program. This option, however, has given rise to a questionable industry in which firms claim to offer loan “forgiveness” or consolidation for a fee. Experts note that changes to college-loan repayment plans are free and have to be processed through the government.
The nonprofit advocacy group Student Debt Crisis also has resources on how to track and repay loans and get answers to questions about repayment options.
Fred Amrein, a financial planner based in Wynnewood, Pa., who specializes in college financing, advises his clients to examine the federal repayment programs before considering defaulting on loans, which may damage a person’s ability to obtain low-cost credit in the future. Many start-up founders pay themselves little or no salary in the beginning, and can qualify for federal income-driven repayment programs.
Mr. Amrein cautioned that such borrowers still have to pay the balance and “interest on the loans may still accrue, depending upon the federal loan type. Yet there’s no reason to default on federal loans.”
Ms. Berendsohn, who says she’s in default on her loans now, wants to continue her education while pursuing her entrepreneurial aspirations. She said that she would like to earn a master’s degree or a Ph.D.
Her new company — CEBerendsohn Arts — specializes in “website creation, photography and mural services as well as the creation of creative product lines.”
For now, Ms. Berendsohn has to move ahead without much financing. “Right now, my business is a small online and word-of-mouth business,” she said.