How to Overcome the Challenge of Starting a Business with Student Loan Debt

by Kiara Swiatek Jan 06, 2022

A narrative told time and time again among millennials and then younger gen Z circles - "I have a really great idea for a business, but I am worried about making my student loan payments." Getting a college education has never been easier than in the twenty-first century; virtually everyone has access to a college, technical school, or trades program. With the rise in accessibility also came the increase in cost. Many recent graduates are left feeling trapped by their mounting student debt, which is stifling their budding business opportunities, ideas, and ventures. People with student loans simply have less money to invest in a new business and often find it harder to gain a loan through commercial lending from a bank with their already mounting debt. Additionally, some would-be entrepreneurs hesitate to pull the trigger on starting their business with the pressure of a hefty monthly payment for the next ten, fifteen, even thirty years and housing, vehicle payments, and other everyday expenses.

When speaking with Alex, a graduate of Emerson College in Boston, he noted that the only way he could establish his media business was with the help of his wife because applying for a business loan wasn't an option for him. Alex had over $100,000 in student debt, while his wife was debt-free, but not everyone is that lucky or has this option and looks at getting a business loan. In 2018, Karthik Krishnan, an associate professor of finance at Northeastern University specializing in student debt, calculated that a person with $30,000 in student loans is 11 percent less likely to start a business than a person who graduated debt-free. This study proves that starting a company begins with gaining control of your personal finances, which will, in turn, help you when it comes to managing your business finances. The status of your loan repayments can affect everything down to the car you drive, the home you live in, and most importantly, your credit score, which allows you to gain the initial capital for your business and ability to get a business loan for a new business. This can either attract or detract potential investors, partners, and future customers. How can you successfully start your business even with student debt?

Know Your Debt and Establish a Plan

Exactly how much do you owe? Who do you owe? What is your interest rate? You might have a general idea or not even want to know the answer. Whatever your feelings on the matter are, you must know exactly how much you owe, who you owe it to, and what those interest rates are. Call your loan servicer to find out the answers to those questions and any others you might have. Once you have a total amount, figure out what you can genuinely pay at your current income level. Can you pay more? Or, is it even possible to afford the minimum? Figuring out the answer will show you if you have the spare capital to start your business or show that you need to find that capital from an investor or another loan such as a business loan for a new business.

Research Repayment Options

Loan types can be broken down into two categories, federal loans, and private loans. If you owe federal student loans, there are many different repayment options at your disposal. Additionally, there are multiple payment options: the standard repayment plan, graduated, extended, pay-as-you-earn, income-based, income-contingent, and many others. Check with a local professional or with the originator of your loan to see if your specific federal loan can qualify for a particular payment option.

Private loans also offer a variety of repayment options. You can defer payments while in school or while engaged in military service or make interest-only payments for a period. Another option to consider is consolidation or refinancing your loans. Consolidation simplifies your monthly process and often lowers your overall interest rate. Alex mentioned earlier in the article notes that after two years of trying to get his company off the ground, he spoke with a student loan expert who recommended consolidation and refinances. Alex's monthly student loan payments went from four separate monthly payments totaling $1,378 to just one payment of $780. Alex extended his fifteen-year term to thirty years, dropping his overall interest rate from nine percent to just four and a half. This refinancing freed up valuable cash in Alex's personal accounts so he can invest in new camera equipment, website tools, and other business expenses and made it possible for him to get the best small business loan available in his area for what he could not readily afford.

Live Cheap and Simplify

In addition to finding a new business loan or refinancing existing loans, a good practice when starting a new business is to live simply while paying off your debt. Even if you qualify for a deferral, consolidation, or refinance and your monthly bills decrease, the debt is still there. Even while making a good salary after starting your company, live with the student mindset until your debt is paid off. Make it your priority to live comfortably but within your current means.

Hit the Books

The overall cost of starting a business dramatically increases when you need to bring others into doing tasks such as website development, general shop renovations, or even business card production. Why not take the time to learn how to do these often simple tasks yourself instead of hiring someone to do them for you? Yes, it might take more time to get these tasks done as you are not a professional in this area, but you will save plenty of money to make up for it. As a savvy millennial once said, "If there is a video on Youtube, you can do it." Having a business is hard work but after you do the hard work of setting it up it can generate types of passive income.

In Summary

Starting a business is never easy, especially when the odds are seemingly stacked against you when you have mounting student debt, but it will always be worth it. The knowledge, experience, and determination you will gain from creating something from the ground up will follow you through the rest of your career, even if you fail the first time. By understanding the impact your student loan debt is playing in your business start-up, and by taking advantage of the tools and resources available to you, you are one step closer to achieving your dream of starting a small business and earning passive income in 2022 with multiple streams of income.