Student Loans are Killing Startups


By Mac Clemmens and Zach Bernstein

For Back to the Roots owners Nikhil Arora and Alejandro Velez, starting their business in their last semester of college was a huge risk, but it is paying off — for them and their employees.

It is a good thing they made the move when they did, according to Arora. “I probably couldn’t have started this business if I were graduating today. I’d have too much student debt hanging over my head.”

He is undoubtedly right; student loan debt has more than quadrupled, from $260 billion to $1.2 trillion, in just the 10 years from 2004 to 2014. And the tsunami of debt is preventing businesses from getting started: the Kauffman Foundation found that startup activity right now remains below the average for the past 20 years, after taking a nosedive in 2010. In addition, the percentage of entrepreneurs who are between 20 and 34 years old has declined from 34.3 percent in 1996 to 24.7 percent today.

For an economy like ours that depends so heavily on entrepreneurship, this threatens disaster.

“It makes more sense to start a company when you’re young,” Arora says, “because of the freedom you have. You have much less to lose and much less at stake. You often don’t have kids to take care of, no big expenses to pay off, and enough time left in your career to pivot if things don’t work out.”

However, Arora says that rising student debt means that “kids with incredible, world-changing ideas face decades of loan payments that restrict their ability to chase their passions and dreams. They never get the chance to unlock their creative potential.”

The same is true for young people who might join a startup as their first step toward entrepreneurship. “Student debt is probably the biggest deterrent to young employees joining a startup,” says Anshul Amar, co-founder of Unfold, Inc., a Los Angeles based startup providing government affairs data services. “Understandably, huge debt loads drive them to work for the largest, most stable employer they can find.”

But many entrepreneurs gain experience - and capital - by working for low pay at startups. As Amar explains, “Sixteen years ago, as a young college graduate, I joined a risky, early-stage startup that now employs over 4,000 people. With today’s high tuitions and debt loads, I doubt I could make the same decision.”

I [Mac Clemmens] know this burden well. I started a business hoping it would pay for college. Rather than spin out cash, the growing business needed money to expand, and I found myself chasing student and personal loans to support the business while I finished school. Ultimately, a loan from the Small Business Administration helped set the business on firmer financial footing, and it is still growing today.

To promote entrepreneurship and grow the economy, we need to reduce the crushing impact of student debt. Here are four elements critical to the solution:

1 - ENCOURAGE STUDENTS TO PICK MAJORS WITH GOOD EARNINGS PROSPECTS

Not all majors are created equal; a political science major opens doors to fewer opportunities than an engineering degree. (Sadly, one of the authors of this piece speaks from experience.) This is why policymakers should provide economic incentives for students to major in the STEM fields — science, technology, engineering, and mathematics — which have too few skilled workers, and where graduates often earn more than double what students with other majors earn. Offering STEM students additional financial aid, or even a free fourth year of tuition, could help graduates start their careers with better-paying jobs. This would enable them to pay off their loans faster, putting them in a better position to become entrepreneurs.

2 - RATE SCHOOLS BETTER, SO STUDENTS CAN MAKE BETTER CHOICES

The US Department of Education recently released a new college scorecard that enables prospective students to evaluate schools based on cost, graduation rate, and salary earned after attending. The idea is to help prospective students make more informed decisions about how much debt to take on, and what to expect from the job market after they graduate. The scorecard needs improvement; it does not include data like the employment rate of recent graduates, or information on the amount of financial aid offered by the school itself, such as how large grants may be or how those grants are awarded. Moreover, some of the information in the scorecard is incomplete, although that is more likely an issue with school reporting. Still, more transparency and clarity in this regard is crucial.

3 - CHANGE THE WAY WE PAY FOR SCHOOL — AND SKIP THE DEBT

Even as a degree becomes more necessary for success — and as more students feel the need to go back and get a postgraduate degree on top of college — the cost and potential debt burden remain prohibitive for many in lower income brackets.

One idea, pioneered by Make School and others, is to avoid tuition entirely. Instead, students pay 25 percent of their first two years’ salary after graduation, and any internship earnings while they are in the pro- gram. This gives educators a financial incentive to be effective, and enables students to quickly pay back what they owe on what amounts to a sliding scale.

4 - INCREASE EDUCATION FUNDING

None of this will matter, though, if higher education costs do not go down or at least increase at a slower rate. Without that piece, fewer and fewer students will be able to pay their way without loans, and those who need loans will face ever-greater burdens.

The main cause of rising tuition is a shift in state budgets. Many states have sharply cut the amount they spend on their state college and university systems. These cuts alone have led to tuition hikes that far exceed the rate of inflation. States must show leadership in reversing this trend. In the short term, providing funding for state colleges and universities hurts state budgets. In the long run, however, states that do not fund education will see their growth rates slow as their most talented youth go elsewhere.

Student debt is not just a problem for students. It has the potential to create a long-term economic crisis by keeping new businesses and jobs from ever coming to pass. That’s a burden none of us can afford.

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Zach Bernstein is the Social Media and Research Manager for the American Sustainable Business Council, the nation’s largest business policy organization advocating for a sustainable economy and Mac Clemmons is the CEO of Digitial Deployment, a Sacramento, CA-based web development company.

This article appeared in Issue 7 | May/June 2016

Issue 7 features exciting interviews and profiles all focusing on youth and Millennials including: Sweetgreen; Radha and Miki Agrawal; Nisolo; a spotlight on the higher education system including a look at the student debt crisis and the top 15 sustainable MBA programs; and our inspiring cover story — Nikhil Arora and Alejandro Velez of one of the most exciting food companies in the nation, Back to the Roots.

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