Student Loan Debt is Harming American Entrepreneurship

January 18, 2019

  1. Talent
2 minutes

Ethan Mollick, a professor at the Wharton business school, Tweets about a paper that causally links student loan debt with declining entrepreneurship in America (including in high-growth, high-tech activities).

https://twitter.com/emollick/status/1085724854433779712

By exploiting two “exogenous shocks” to the student loan system (unexpected changes that were made independently of the student loan-entrepreneurship relationship), the authors demonstrate that student loan debt not only causes individuals to start fewer businesses (especially in the high-tech, high-growth segments), but when they do, they are (a) less likely to be successful, and (b) experience greater hardship from business failures (which are themselves already more likely because of student loan debt).

These are not exactly the types of conditions that encourage people to start new ventures, particularly when competing in a harsh competitive environment of increasing market power, raising incumbency advantage, and expanding wage opportunities at larger companies (translation: it’s harder to compete, and you have to give up more to do it).

The paper, The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship?, was written by Karthik Krishnan of Northeastern University and Pinshuo Wang of the University of South Florida. It was actually published last May, but I was not aware of it until now. Here’s the abstract:

We find that student debt is negatively related to the propensity to start a firm, particularly larger and more successful ventures. An exogenous change due to the Higher Education Amendments of 1998, which made student debt completely nondischargeable through personal bankruptcy, reduced the likelihood of entrepreneurship by student loan borrowers that were already in four-year college at the time of this regulation. Moreover, an exogenous shock to the level of student debt due to the Higher Education Amendments of 1992 negatively impacts entrepreneurship rates for students already in four-year college at the time of this regulation. Entrepreneurs with more student debt are more likely to fall behind on their student debt payments, and this relation is mitigated when their ventures are successful. Our evidence indicates that student debt inhibits entrepreneurship by exacerbating the effect of negative business outcomes on the individual.

I have been slow to embrace the idea of student loans as a cause of declining entrepreneurship rates, even in spite of the sensibility of the idea and my own personal experience—the established evidence just wan’t there until recently. However, it seems pretty clear by now that we have a big problem on our hands.

America’s policy choices around higher education and how it’s financed need a serious rethink. The student loan system is one of the most glaring examples of how well-intentioned federal government policies are harming the American workforce and it’s entrepreneurs–or more to the point, it’s would-be entrepreneurs who won’t be because of financial burdens from student loan policies.

This is a big problem that needs correcting right away. If student loan debt is driving down entrepreneurship, that’s bad for jobs, bad for incomes, bad for economic growth, and bad for the American dream. Congress and this Administration should act and act now.

 

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