Read on to understand the challenges you may face in your founder's journey.
Starting a small business is an uphill battle. In fact, more than half of all small businesses in the U.S. fail within 5 years—a statistic that’s generally stayed the same for decades.
But here’s the thing: Entrepreneurship is even harder if you’re also shouldering substantial student loan debt. Further education may be crucial to the success of your new venture, but the cost of that education can very well put you out of business if you’re not careful.
Building a successful business with student loan debt is still possible though. It just takes upfront research, careful planning, and financial savvy. If you’re unsure whether entrepreneurship is the right move for you, read on to understand the challenges you may face in your founder’s journey, plus some tips to help you through those crucial first few years.
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3 Challenges of Starting a Business When You Have Student Debt
1. Student Loan Payments Divert Money Away From Your Business
Today, about 46 million Americans carry almost $1.75 trillion in student loan debt. And before the White House instituted the repayment moratorium at the start of the COVID-19 pandemic, the average monthly loan payment for student loan borrowers was $300.
Unless you have capital to work with, much of your business startup costs will come out of your own pocket. Of course, you likely have other expenses—such as groceries, rent, and utilities—that will also divert money away from your business.
Carrying student loan debt means you have that much less money to invest in the success of your business, unless you find other funding opportunities.
2. Student Loan Debt Makes It Harder to Get Business Financing
Some types of businesses can be established without a lot of money in the bank (think along the lines of freelancer service providers, dropshipping businesses, and online courses).
Others, however, require extensive upfront investments—which can be hard to save up for when you also have student loan repayments to make. In cases like these, taking out a small business loan can help.
The problem is, when small business owners carry a lot of student loan debt, a loan provider is less likely to see them as a good candidate for these loans. And when you’re strapped for cash and unable to find funding elsewhere, that limits your ability to start and grow a successful business.
3. Entrepreneurship Is a Big Financial Risk for Borrowers
With student loan debt impacting so much of a borrower’s life, it’s important that those payments are made on time every time. But this requires a steady income—something that entrepreneurship notoriously lacks, at least in the first few years.
As a result, an aspiring entrepreneur may see starting a business as too big of a risk at this point in their life. Research from Young Invincibles backs this up: Almost 25% of self-employed young adults admitted to an inability to meet their essential expenses each month.
5 Tips to Help You Start a Business While Paying Student Loans
1. Master Your Personal Finances
It’s important to work towards your vision of the future, but you can’t lose sight of your present needs in the process. That’s why it’s important to understand your current financial situation:
- How much you owe in student debt
- How much monthly payments are for student debt
- What your fixed expenses are
- How much you can afford to save
Save money where you can too. Put your federal loan monthly payments on auto-pay to save 0.25% in interest and ensure on-time payments every time. Meanwhile, reduce your spending on nonessentials while you use your discretionary income to bulk up your savings.
An emergency fund with at least 6 months’ worth of necessary expenses will also help tide you over during the unprofitable months. Having a rainy day fund that can cover both your student loan payments and business expenses can make a world of difference for your company’s success (and your level of stress).
2. Consider Alternative Repayment Options
And speaking of cutting back on expenses, changing your repayment plan can help you save hundreds of dollars each month that you can then invest in your business instead.
Depending on your situation, you have a few options to choose from:
- Temporarily postponing student debt loan payments with a deferment or forbearance
- Paying only what you can afford with an income-based repayment plan
- Refinancing your federal student loan debt with a private lender for more flexible terms
Of course, each of these options come with strings attached, so do your due diligence before taking the plunge to make sure that the option you choose is the best one for you.
Taking the entrepreneurship route often means that, in the beginning, your income isn’t guaranteed. You may find yourself operating at a loss (supported by additional federal loans or private loans) for months or even years before you break even. That’s why every dollar you can use to keep your business up and running is crucial to maintaining its longevity.
3. Review Other Business Financing Options
As mentioned earlier, applying for small business loans may be difficult if you’re also paying off your student loans—but that doesn’t mean you’re out of luck. There are alternative financing options available, and one of them may be just what you need to get your business started.
Take a look at the business financing options below:
- Ask family members and friends to invest in your business or loan you money
- Secure funding from angel investors who believe in the success of your business (check sites like AngelList and Angel Capital Association)
- Raise money from crowdfunding platforms like Kickstarter, GoFundMe, and Indiegogo
- Receive interest-free loans and build your credit at the same time through lending circles
4. Work With a Mentor or Business Coach
As a first-time business owner, you don’t know what you don’t know—and this inexperience can cost you dearly in time, money, and effort. But by working with a mentor or hiring a business coach with expertise in your industry, you’ll inevitably find yourself spending your time and resources more effectively.
Not only can a mentor or coach fill in any knowledge gaps you have in areas like networking and marketing, but they can also:
- Help you develop a business plan to take to investors or lenders for funding
- Act as a sounding board for your ideas and strategy
- Steer you and your business in the right general direction
Take advantage of your educational institution’s resources and tap your alumni network for entrepreneurs, professors, and experts in your industry. You can also look into the local assistance resources provided by the Small Business Administration (SBA), or get matched with a business mentor for free through SCORE.
5. Look Into Federal Loan Forgiveness Programs
Not everyone qualifies for student loan forgiveness, but with the huge potential upside, the additional resources offered by the federal government are certainly worth looking into. Student debt forgiveness programs for federal student loans are available for vocations such as nursing, medical research, education, military veterans, volunteering, law, veterinary science, and more.
Your Student Loan Burden Doesn’t Have to Be a Burden
Sure, there are risks involved with starting a business and that monthly payment against your student debt sure is a pain. But remember nearly every decision you make comes with some sort of risk. Understanding your situation and your risk tolerance can play a large role in managing that.
Do your research on what exactly it’ll take to execute your small business idea, keeping your student loan repayment obligations in mind. Then make your final decision based on the data you’ve gathered.
With a relentless pursuit of your goals and a touch of luck, you can start a business, despite student debt. And make your dreams of becoming a successful small business owner a reality.