Guest Blog: Entrepreneurs: Student Debt Doesn’t Need To Hold You Back

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[vc_row padding_top=”0px” padding_bottom=”0px”][vc_column fade_animation_offset=”45px” width=”1/1″][text_output]Guest blogger: Nate Matherson

It seems like we’re always hearing stories about young entrepreneurs launching startups or starting their own small businesses, but are young people really starting more businesses now than they were ten or twenty years ago?

According to the Kaufmann Foundation, they’re not. In a recent report, they found that the large student loans that many millennials are graduating with could be keeping them from launching their businesses since as the average student debt has increased, the number of startups launched by young people decreased.

The number of new entrepreneurs aged 20 to 34 hit a high in 1996 at 0.28%, but by 2014 only 0.25% of young people were launching their own businesses and since then that number has fallen further to just 0.22%. According to the study’s authors, in 1996, young people were the group most likely to start a company – but now they’re the demographic least likely to launch a start-up.

So, what can you do if you’re interested in being an entrepreneur, but find yourself saddled with large student loans? Student debt will likely make your start-up dreams more difficult since having to make monthly payments on your loans will put additional stress on your business to make enough money. It could also mean that you will be paying your loans with money that you might otherwise have kept in your business.

But you don’t have to give up on your dream to start a company just because you’re in debt. When I started LendEDU at the Iowa Startup Accelerator, I had about $50,000 in student loan debt. Here are some suggestions for how to make it work:

1. Income-Driven Repayment Options

When it comes to your federal loans, there are a number of ways to reduce your payments while you’re starting up your business. Income-driven repayment plans offer you a reduced payment as you pay just 10 percent to 20 percent of your discretionary income towards your loans. After 20-25 years of on-time payments, your loans are forgiven.

Not only could this reduce your payments, but it could also allow you to continue to reinvest earnings into your business rather than taking them out as income. This will allow you to expand your business without worrying so much about your student loans. The one downside is that you’ll pay more money in interest on your loans over time since you’re taking longer to pay them back.

2. Alternative Repayment Options

Another way to reduce your monthly payments is to extend the length of your loan, change the structure of your repayment, or reduce your interest rate.

For federal loans, in addition to income driven repayment options, you can also consolidate your loans and extend the term of your loans to up to 25 years. While you won’t save on interest when you consolidate your federal loans – those extra years will reduce your monthly payments significantly.

Another way to reduce your monthly payments on your federal loans is to sign up for a graduated repayment plan. These repayment plans allow you to pay less during the first two years. After that, your payments gradually increase every two years until you hit year six when they remain the same afterwards for the life of the loan.

If you have private student loans, refinancing your loans is a great option for reducing your monthly payments. The problem is that it might be harder for entrepreneurs to qualify since you need to have good credit and an income. To get around this, you could ask a close friend or family member to co-sign for you. When you refinance your loans, you can often qualify for a lower interest rate which could significantly reduce your monthly payments and mean that you pay less over the life of your loans. You CAN consolidate private and federal loans together. When refinancing, you also have an option to change the term length up to 25 years. A longer term length will lower your monthly payment but also increase the total loan cost. However, there are generally no fees if you are interested in prepaying your balance.

3. Lifestyle Changes

Whether or not you have student loans, the biggest factor in your success as an entrepreneur is often what you’re willing to sacrifice in order to succeed. Starting a company is expensive and often cash intensive. There will likely be times when cash flow problems could potentially cripple your business or your personal finances. That’s why it’s so important for you to live frugally as an entrepreneur.

For some people, that might mean moving back home with Mom and Dad in order to save on rent. For others, it could mean renting a house with friends or co-founders and sharing expenses. It’s important to cut back on things like eating out, going out with friends, and unnecessary purchases. This will allow you to focus the money you do have on paying off your student loans and growing your business.

Having a personal and business emergency fund is also key. The last thing that you want to do is default on your student loans or not have enough money for a key business expense. Doing either of these things could affect your personal or business credit – and that would make borrowing for your business in the future very difficult.

You Can Succeed

Just because you have student loans doesn’t mean your dream of being an entrepreneur is over. By planning appropriately for both your business and your student loan payments, you can thrive and grow your business.[/text_output][/vc_column][/vc_row]