Super-sized debt crushes business dreams of US grads
WASHINGTON/NEW YORK: Dr Steve Sherick wants to build the emergency-care business he started two years ago that now employs seven doctors and two part-time administrators. The US$300,000 in student loans he and his wife carry makes that prospect difficult, he said.
Sherick, 36, who contracts with a local hospital in Trinidad, Colorado, about 200 miles south of Denver, graduated in 2009 with about US$140,000 of debt. That’s not counting the student loans of his wife, a paediatric oncologist, and their mortgage. He would like to hire a full-time administrator and offer more competitive salaries to entice doctors to work in the rural community.
“It deters an entrepreneurial spirit when you already start four steps behind the starting line,” said Sherick. “The student debt increases the risk for an entrepreneur like me and makes it harder to expand new business, get loans and thus hire new people.”
Former students hobbled by a collective US$1 trillion in education loans can be hindered in expanding or forming small businesses and creating jobs for themselves and others. While self-employment among those 65 years old and over increased 24 per cent in 2010 from 2005, it fell 19 per cent among individuals 25 and under in the same period, according to the Small Business Administration.
“The burden of student debt probably places pretty big constraints on your viable options after graduation,” said Dane Stangler, director of research and policy at Kansas City-based Kauffman Foundation, which focuses on supporting entrepreneurship. “With more student debt and stricter bank lending, it really hinders the ability of students to take risks, start a company.”
The share of 25-year-olds with student debt increased to 43 per cent last year from 25 per cent in 2003. The average education-loan balance among that age group grew by 91 per cent over the period, to US$20,326 from US$10,649, according to the Federal Reserve Bank of New York. Those balances, which now exceed credit-card debt, are impeding young adults under age 30 from buying homes and cars, according to an April blog post on the bank’s website.
Student debt can also suppress risk-taking and innovation by discouraging the formation of new businesses, the federal government’s Consumer Financial Protection Bureau (CFPB) said in a report released on 8 May, which attracted over 28,000 comments.
“For many young entrepreneurs, it is critical to invest capital to develop ideas, market products, and hire employees,” the CFPB said in its report. “Student debt burdens require these individuals to divert cash away from their businesses so they can make monthly student loan payments.”
Almost 23 per cent of 9,500 respondents stated they had put off starting a business because of monthly student debt payments owed to private lenders, according to a 2013 survey by the Young Invincibles, a non-profit youth advocacy organisation, referenced in the CFPB report. Eight per cent of those with private student debt stated that they were unable to start a business because they were denied a loan, survey respondents said.
Those with debt financed by private lenders said they had less flexibility to enrol in repayment plans to allow them to better manage cash flow than those with federal student loans, according to Jen Mishory, deputy director of Young Invincibles. For government-backed loans, students can often work out more affordable options such as payments with caps based on income and family size.
Katie VanDyk, who graduated from Tulane University Law School in New Orleans last year, said her student loans of about US$180,000 put going into business full time on the back burner. “You can’t look at the big number every day, you just chip away at it,” said VanDyk, who now works as a lawyer in Austin, Texas. “It is intimidating because it is going to be about 20 years before I pay it off.”
VanDyk, 26, started an online business in 2011 for sorority recruitment with her brother Wes VanDyk, who has about US$38,000 in student debt.
“It’s a big burden and if there was a way to mitigate that, it would free up the potential to do things and take more risks,” said Wes VanDyk, 23, who graduated from the University of Georgia in business management last year and continues to operate the company, which his sister is involved with part- time. My debt “weighed on my conscience as I was deciding to move forward with the business.”
About 15 per cent of outstanding education loans consists of private debt, and a combination of private initiatives and public policy could help ease this burden, the CFPB has said. There were more than US$8 billion in defaulted private student loan balances at the end of 2011, with more in delinquency, according to the CFPB.
“The consequences of not meeting those loan obligations are very severe,” said Rohit Chopra, the CFPB’s student-loan ombudsman. “Once they become late, or delinquent or in default, that makes it more challenging for them to access personal credit in order to build their businesses.”
Interest on some new federal loans is set to double to 6.8 per cent by 1 July if Congress doesn’t extend the current rate. An election-year deal last year froze rates at 3.4 per cent for one year on subsidised Stafford loans, which are available to low- income students. President Barack Obama on 31 May urged Congress to pass his legislation to prevent the increase when that measure expires.
While a bankruptcy can wipe out housing and credit-card debt, there’s no forgiveness on student loans. Since a 2005 change in bankruptcy laws, student debt can’t be discharged, barring reasons such as severe and permanent disability. Lenders can garnish income-tax refunds, wages, and even Social Security checks to get repayment.
Student debt may have another effect on small business by influencing graduates’ job choices, the Main Street Alliance, an organisation with some 1,200 small business owners in the US, wrote in a comment letter to the CFPB in April. Small business, defined as an independent operation having fewer than 500 employees, created 66.1 per cent of net new jobs from the third quarter of 2009 through the third quarter of 2012, according to the Bureau of Labor Statistics.
“Student debt burdens may cause valued employees to leave the ‘family’ atmosphere of a small business by seeking opportunities with larger businesses with more lucrative benefits,” the group wrote.
Sherick says he experiences an aspect of that effect in trying to expand his business. “Because of student loans, doctors want to cluster around the urban area where they can make more money,” he said. “I have a competing interest when I’m trying to recruit,” Sherick said. “It is hard for me to pay them more.”
Sherick says he tries not to think about the enormity of his loans, which he expects to pay back in 20 years. “At the end of the day, you have to be struck by a fairly insane sense of optimism that things are going to be better tomorrow than they are today,” he said.