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Student Loans Stunting Small Business Growth

Chad Brooks
Chad Brooks

Student loans aren't just negatively impacting you financially; they're also hurting your chances of starting a new business, research finds.

Entrepreneurship is significantly hampered in parts of the country where residents carry more student loan debt, according to a recently updated study by researchers at Pennsylvania State University and the Federal Reserve Bank of Philadelphia.

For the study, student loan debt across the United States was analyzed by county and compared with small business creation in those areas. Researchers discovered that between 2000 and 2010 a one standard deviation increase in student debt reduced small businesses in those counties by an average of 14 percent.

Based on the data, the study's authors believe potential entrepreneurs are so burdened by student debt that they're unable to borrow the money needed to start new businesses.

"The research shows that individuals need to pay special attention to the decisions they make and realize that incurring debt has consequences," Brent Ambrose, one of the study's authors and a professor of real estate at Penn State's Smeal College of Business, said in a statement.

The study revealed that the correlation between student debt and business creation only exists among the smallest of small businesses, since those are the ventures that are most likely to rely on the founder's personal credit.

The study's authors said they interpret this to mean that entrepreneurs starting larger firms have greater access to outside funding.

Overall, there is currently more than $1 trillion in student-loan debt in the United States. The researchers said that while other forms of consumer debt — such as home equity loans, auto loans and credit card debt — declined during the recent recession, student loan debt increased, nearly tripling. In 2012, student loan debt accounted for 10 percent of all consumer debt, up from just 2.9 percent in 2000.

The researchers believe the study's results may have significant implications for the economy as a whole, since its success relies so heavily on small businesses. Data from the United States Small Business Association show that small businesses account for 99 percent of all businesses and almost 60 percent of new jobs in the private sector.

"Given the enormous growth in the use of student debt in recent years, the issue of whether it may impact future small business formation is becoming critically important," Ambrose said.

The study, The Impact of Student Loan Debt on Small Business Formation, was co-authored by the Federal Reserve Bank of Philadelphia's Larry Cordell and Shuwei Ma.

Image Credit: Brian A. Jackson/Shutterstock
Chad Brooks
Chad Brooks
Business News Daily Staff
Chad Brooks is a writer and editor with more than 20 years of media of experience. He has been with Business News Daily and business.com for the past decade, having written and edited content focused specifically on small businesses and entrepreneurship. Chad spearheads coverage of small business communication services, including business phone systems, video conferencing services and conference call solutions. His work has appeared on The Huffington Post, CNBC.com, FoxBusiness.com, Live Science, IT Tech News Daily, Tech News Daily, Security News Daily and Laptop Mag. Chad's first book, How to Start a Home-Based App Development Business, was published in 2014.