Limit Student Loans to Increase Chances of Startup Success

Student loan debt can affect entrepreneurs’ ability to take risks and borrow capital.

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Avoid taking out private student loans if you are serious about starting your own business right after school.

The Student Loan Ranger has written before about how student loans may be prolonging the recession and the New York Times and others have opined that it may be a drag on the economy. Recently the Wall Street Journal reporter Ruth Simon dug deeper to explore how student loans are specifically affecting entrepreneurs.

Not surprisingly, the article illustrates that the impact is both negative and considerable, especially because a disproportionate number of disruptive startups have been founded by recent graduates and dropouts.

High student debt affects entrepreneurs' ability to take risks and borrow the capital they need. Others are forced to choose between pursuing their dreams and finding a way to manage their loans or deferring their dreams and taking a safe job.

So how should a budding startup entrepreneur plan for a future career? Of course, the best way to deal with student loans is not to have them in the first place. At every level of higher education, you should look for ways to save money.

[Get tips on saving money like a college cheapskate.]

For example, you should carefully compare the costs of the colleges and universities you get accepted to in order to maximize the value of your degree. It is essential to look at net cost, not just tuition, to account for fees – which increase costs – and grants and scholarships which lower costs.

Use the Department of Education's College Affordability and Transparency Center to find links to colleges' net price calculators and its College Navigator tool to compare schools. You may find that the best value lies in starting in community college and then transferring to a four-year university.

[Learn why students should check a net price calculator.]

Like every student, you should fill out your FAFSA, which is required to secure access to federal student aid, including federal work study, grants and federal loans. This is particularly important since you are planning for a career that will entail some financial risk.

Only borrowers with federal loans have access to hardship deferments and highly protective income-driven repayment plans that limit monthly payments to an affordable percentage of your income and provides for forgiveness after 20 or 25 years.

If you are serious about starting your own business right after school, you should avoid private student loans. Just as you wouldn't invest in your business by borrowing on a credit card, you shouldn't invest in your education with private loans if you have any doubt about your ability to rapidly pay them back.

Social entrepreneurs interested in giving back to society should also be aware that Congress created Public Service Loan Forgiveness in the College Cost Reduction and Access Act of 2007 to provide an incentive for students to enter public service. The program provides forgiveness after 10 years of full-time employment at a wide range of public service jobs, including 501(c)(3) nonprofits.

[Explore how the student loan deal is good and bad for borrowers.]

The ability to earn loan forgiveness should be considered by social entrepreneurs pondering whether to found a for-profit or nonprofit organization.

To make sure you fully understand the requirements to earn forgiveness and to learn about other options to manage student debt, get a copy of our comprehensive e-book, "Take Control of Your Future."

Last but not least, the Student Loan Ranger thinks more entrepreneurs should get involved in finding ways to use online technology to lower the cost of education. As the Student Loan Ranger has noted, numerous Silicon Valley startups are taking aim at higher education, which some view as an overpriced and inefficient $1 trillion business.

We're not sure if that's a totally accurate description, but we are sure there's room for more competition and that nobody has yet succeeded in substantially driving down the cost of college. Now that you know how to manage your student debt, maybe it will be you.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.