Economists are finally coming around to the idea that student loans are preventing many Americans from starting a business. To those of us with student debt, this “revelation” is no surprise. The good news is that student loan borrowers don’t have to give up their dreams of starting a business.
Starting a small business can be difficult for student loan borrowers, but it is possible. Many student loan programs can be used to help entrepreneurs pursue their goals.
The key is to understand the ways that student loans make things difficult and the tools to mitigate the damage that can be caused by student debt.
Student Loans and Entrepreneurship
Student loans make starting a business difficult in two critical ways.
First, having student loans means having a monthly student loan bill. While business owners can try to cut corners on their housing and personal budget, student loan lenders would have borrowers believe that there is no alternative to the monthly payment. Student loan bills make the idea of an uncertain income especially scary. This extra financial commitment makes steady employment from an established employer more appealing.
The second hurdle caused by student debt is the challenge of getting funding. Many applicants for small business loans have been rejected because their student debt made them too big of a risk to the lender. This lack of funding ends many businesses before they can start.
Fortunately, there are ways around both of these issues.
Student Loan Repayment for Small Business Owners
Running a business is all about cash flow. Having a huge student loan bill can be a major problem.
Borrowers interested in starting a business need to get their monthly payments as low as possible.
Federal Loans – Business owners with federal debt are in luck. By signing up for an income-driven repayment plan, such as Pay As You Earn, monthly payments can be tied to income rather than the student loan balance. If your business is struggling to turn a profit, your student loan payment could be $0 per month. Going this route will mean that your student loan balance will grow, but it affords financial flexibility.
Sherpa Tip: Borrowers who have low income-driven payments due to low discretionary income should seriously consider the Revised Pay As You Earn Repayment Plan, also called REPAYE. This plan forgives a portion of the monthly accrued interest which means balances grow slower.
Private Loans – Student loans from private lenders are much less flexible. Some lenders do have special programs for entrepreneurs, but these are rare. Most borrowers will have to make due by stretching out repayment to make monthly payments as small as possible. Going this route will make repayment take longer and cost more, but it frees up much-needed cash each month.
One of the best ways to stretch out private loans over a long period at a low interest rate is to refinance them.
The following lenders currently offer the lowest rates on 20-year fixed-rate loans:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| 1 |  | 6.08%* | Splash Financial Review |
| 2 |  | 6.53% | ELFI Review |
| 3 |  | 6.55% | Laurel Road Review |
Small Business Loans with Student Debt
Addressing federal loans with an income-driven repayment plan and private loans with a long repayment period will do more than just lower payments each month. These changes will also help with small business loan applications.
When lenders evaluate any sort of loan application, one of the biggest things they look at is a borrower’s debt-to-income ratio. This number compares the expected income to expected monthly bills.
By tweaking student loan repayment to get lower monthly payments, borrowers can improve their debt-to-income ratio without spending any extra money.
Another way to get the funding necessary to get a business running would be to track down a 0% Intro APR credit card. Credit card companies will often offer the low intro APR to secure new customers. If your business needs a quick cash infusion and the debt can be paid off after a few months, a credit card promotion could be a great option.
A Common Business Owner Mistake
Many lenders will suggest that borrowers interested in starting a business take a deferment or a forbearance to take a break from payments.
While skipping a few months of payments may sound appealing, it can be a huge mistake.
The biggest problem with a deferment or forbearance is that it can derail applications for new loans, such as a mortgage or small business loan. When lenders see a forbearance or a deferment, they usually assume the worst. They see it as a sign of financial hardship and an indication that the loan might be riskier. While income-driven repayment and long repayment terms are commonly accepted strategies, debt that is deferred is seen as more of a red flag.
Sherpa Tip: Save deferments and forbearances for emergencies. Lenders limit the number of times borrowers can get a pass, so use them as a last resort if you get unexpected bills or unforeseen costs.
Saving Money on Business Creation
Having student loans makes it especially important for business creators to find a way to reduce costs.
The less a business costs to operate, the more time the owner has to grow it into a successful business.
There are several different ways to save money on the cost of starting a business:
- Start your business as a side-hustle – Having a regular job in addition to running a business can mean a hectic schedule, but it also means less pressure on the business to be an immediate success. The safety net of a regular job makes starting a business much less of a risk.
- Think about manual labor – Those that want to be self-employed should give serious thought to jobs like landscaping, snow removal, pet sitting, and house cleaning. These blue-collar jobs may not be glamorous, but the startup costs are relatively low, and the hardest workers will be the ones who succeed. As the business grows, employees can gradually be added to the team.
- Pass on the storefront – Retail space can be costly and it doesn’t ensure success. If you are selling a product with your business, start by marketing it online. A quality website costs far less than finding the right real estate. Another option would be to get your stuff on somebody else’s shelves.
- Think about an office share – If you are starting a service-oriented business and what to have dedicated office space, look into shared office spaces in your community. Office shares create a very professional atmosphere for clients at a fraction of the cost.
- Consider moving – Many communities are student loan repayment assistance to borrowers looking to start a business. These communities recognize the hurdle of student debt, and they want to attract new businesses.
Final Thoughts
Politicians like to call small businesses the backbone of the economy, but student loans can present a unique challenge to small business creation.
However, entrepreneurs who get creative with their business strategy and with their student loan repayment can find a way to make things work.
