Student Loan Debt and the Cost to Entrepreneurship
Young people are generally praised as being more innovative and risk-takers. With more college graduates in the workforce today than ever before, you’d expect to see our current generation of graduates being industry leaders in entrepreneurship. However, this doesn’t appear to be the case. Millennials are being called the “least entrepreneurial generation in recent history,” and data suggests they are less likely to start their own business than generations before them.
The number of MBAs awarded has doubled since 2008 – from 100,000 a year to around 200,000 a year – it seems like we should be seeing a much greater rise in younger people with startups. Sadly, less than 4 percent of millennials report being self-employed, down from 5.4 percent of Gen X and 6.7 percent of Baby Boomers. Why are millennials having such a hard time getting their business dreams off the ground?
Student Debt is a Big Factor to Fewer Startups
It’s no secret that education costs continue to rise. With rising education costs, we see more students taking out loans. Researchers Arnobio Morelix and E.J. Reedy discovered that the rise in student debt has coincided with a decline in younger people starting their own businesses. In 2007, total student loan debt amounted to about $516 billion. Today, student loan debt is more than $1.3 trillion. In 1996, 34.8 percent of startups were created by 20-34 year-olds. In 2013, the percentage of startups created by 20-34 year-olds has dropped to 22.7 percent.
Debt can have an enormous impact on the ability to start a business venture and it appears the weight of that debt is deterring many to pursue business ownership. We’ve all heard that you need to spend money to make money. It is pretty clear that money spent on debt is money that can’t go toward business development. Debt from student loans also reduces people’s credit and ability to take out loans for business ventures.
Poor Loan Planning Creates More Financial Difficulty for Would-Be Entrepreneurs
Yet another way debt has prevented graduates from creating startups is that many students fail to make accurate estimates about how much money they needed for their loans. One poll conducted found that half of the students said that they borrowed an average of $11,597 more for their undergraduate loans than was needed. Students also didn’t try to figure out how much their monthly payments would be before taking out those loans. These factors add to the growing list of financial deterrents for starting a business.
Concerns for a Nation Lacking Innovators
In his address to the Committee on Small Business and Entrepreneurship in the United States Senate, John Lettieri (co-founder and senior director of the Economic Innovation Group) stressed the importance of innovators and pioneers in America. He also brought to light his concerns of reduced economic dynamism, which he attributed to the decline of entrepreneurship. So while there is a personal impact on a generation of business graduates, there’s also a national impact with not having more innovative minds that can add to the economy and keep America competitive with the rest of the world.
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