Are your student loans keeping you from starting a business?

October 09, 2013

Student loan debt and entrepreneurism aren't mutually exclusive. Here are tips for managing debt while launching a small business.

Never mind that student loan debt may be a drag on the economy at large. For you it’s personal. You earned one, maybe two degrees, spent a few years honing your skills as an employee and now you’re ready to run your own small business. There’s just one not-so-little problem: your student loans. Student loan debt for U.S. grads tops $1.2 trillion, with the average borrower graduating $26,600 in debt. If you have similar amounts to repay your ability to take risks and borrow capital is crippled; the choice becomes follow your entrepreneurial dreams, or take a safe job with steady pay to satisfy the loans.  But if you’re one of the 57% of grads that have student loans to repay all is not lost.  You can still pursue small business ownership through careful budgeting, self-discipline, and loan management.

If your loans are Federal they can be consolidated, reducing your monthly payment. Your interest rate won’t change, but extending the repayment term from 10 to 25 years reduces monthly payments by 40 percent. Graduated pay options further minimize upfront payments; these programs start with a reduced monthly payment that increases after years two, four, and six. If your start-up operates at a loss for a while and your loans are Federal you can lean on the Income Based Repayment (IBR) or Pay As You Earn (PAYE) plans, which help borrowers facing periods of low or no income. Here your monthly payment is capped to a percentage of what you earn, not what you owe. If your income suddenly drops or stops, you may have a monthly payment of $0. If your loans are private your options for deferment are more limited, as few private lenders consolidate loans, provide reduced rates or extend repayment terms. Most will at least offer need-based forbearance or 12-month breaks from making payments.

Are you a social entrepreneur? If you’re interested in giving back through your small business look into Public Service Loan Forgiveness. Congress created this program in 2007 as an incentive for students to enter public service, granting loan forgiveness after 10 years of full-time employment in public service, including 501(c)(3) non-profits. This should be a consideration as you decide to found a for-profit or nonprofit organization. While the idea of reducing monthly payments is enticing, keep in mind it doesn’t reduce your debt. Stretching a $35,000 loan’s term from 10 to 25 years triples the interest due over the life of the loan, from $13,000 to $39,000. And if your monthly payment doesn't cover interest, negative amortization can cause your loan balance to grow exponentially. Yikes! An alternative to postponing or extending your loans may be to take the corporate gig before you pursue starting a small business. Develop a savings strategy to help you stay current on loan payments while your start-up income is in flux, or take on consulting gigs to earn extra income. Budget six to eight months for this ramp-up period and make lifestyle sacrifices like taking on a roommate, dropping your restaurant meal habit or ditching the car for public transportation. Another resource is “Becoming Your Own Boss in 12 Months” by Melinda Emerson, best known as the SmallBizLady. Sure, it’ll be hard to launch a small business with mounting student loan debt, but in the end it will also be worth it.