There’s no doubt that student loan debt is a massive issue in the U.S. Collectively, Americans owe over $1.4 trillion in student loan debt spread out among 44 million borrowers—and it’s only growing. 70% of students this year graduated with loan debt, averaging around $35,000—up from $13,327 in 1995.
A debt load can make it very difficult for young people to procure financing if they want to start a business. A recent Stanford graduate carrying a debt of roughly half his education reported receiving 96 loan rejection letters when seeking capital for a small gym franchise he was helping to build.
But that doesn’t mean it’s hopeless.
If you’re really itching to get your small business going while holding onto seemingly prohibitive loan debt, there are several options and approaches to consider. It’s better to have a full knowledge of your options prior to going forward with a business plan or strategy.
Generally speaking, if you’re an aspiring entrepreneur in this unfavorable position, there are three areas to consider and explore:
- Options for managing your debt
- How you acquire funding
- Some general best business practices to make this whole process go a lot more smoothly
We’ve laid all three out below so that you can stop worrying and start planning your business’s future.
Taking steps to get your student loan debt under control should be your first step if you want to make life easier as a small business owner—your debt could even be what’s preventing you from getting started in the first place. Fortunately, there are many options available to help relieve such a burden.
For most people, when you first receive loans, they come from a few or many different sources with different terms and interest rates. But you can cut out all those variables by consolidating your loans.
This is super easy to do through your bank or another loan provider—consolidating will most likely give you a better rate simply because it makes the amount of a single loan higher. At the very least, it will make it easier for you to track and manage your debt by having it all in one place.
Just make sure when you refinance to obtain a lower interest rate that you won’t be losing out on any federal loan forgiveness programs, states Inc.com: “If you currently are taking advantage of such programs (for example, by teaching in low-income areas or working in nonprofits or fields such as nursing or law enforcement), consolidating your loans could affect the terms of that forgiveness.”
Income Based Repayment
If you borrowed federal loans, you might qualify for the forgiveness programs mentioned above, such as Income Based Repayment (IBR) or Pay As You Earn (PAYE), which cap your monthly payments to a percentage of what you earn, not what you owe. This means that if your income suddenly takes a dive or stops altogether, you may have a zero monthly balance. Monthly payments under IBR and PAYE repayment plans are capped at 15% or 10% of your discretionary income.
You have to qualify and file an application with the Department of Education every year. And, of course, this does mean that you’ll accrue more of a burden through interest over time. That certainly isn’t ideal, but as long as you can manage to pay it off monthly, this could be a good option if necessary.
The good news is, currently, any balance remaining after 20 to 25 years of consistent payment will be totally forgiven after that point. Just make sure that if you go this route and qualify, refinancing the loans later on might be a tough choice to make. But it’s a great option if you need to cut monthly costs and are experiencing low income.
A number of startup loan providers are popping up all over the internet and your subway ads. These companies include SoFi, CommonBond, LendKey, and Earnest. “But to qualify for most loan refinancing, your credit score has to be good—in the high 600s at least,” says Inc.com. “Also, you likely won’t be eligible if your record includes any bankruptcies or defaulted student debts.”
These startups tout much lower interest rates by consolidating your debt through their services. But how do they do it? Make sure that by refinancing through a nontraditional source (e.g., not a bank) that you aren’t paying high fees or putting yourself at future risk unnecessarily. That’s not to say these companies are sharks—they’re just less established. Essentially, these companies are investing in curbing millennial debt in the hopes that millennials, in the future, will use their services for more lucrative financing programs like mortgages and small business loans.
SoFi also provides an interesting Entrepreneurship Program that anyone can apply for. It’s designed specifically for people with debt who want to start small businesses. The program includes financial advising, mentoring, and networking.
You do, of course, have the option to defer payments altogether. In other words, you can temporarily opt out of required monthly payments until you’re ready to cough up again. It can be as easy as clicking a button on your loan provider’s website. But you should consider deferment a last resort. “Short-term debt relief is not without long-term pitfalls,” says Entrepreneur magazine. “Simply stretching the term of a $35,000 federal loan from 10 to 25 years triples the interest due over the lifetime of the loan, from $13,000 to $39,000.”
Once you’ve got your debt under control, it will be much easier to go forward with a funding or financing plan. No two businesses are the same, thus no funding option is truly better than another—it’s good to know what’s out there and assess what’s right for your business.
Small Business and Startup Loans
There are plenty of lenders geared specifically toward brand-new businesses. The main factor they consider? Often, it’s your credit score.
Angel investors have such a positive nomenclature because for a moderate stake in whatever you’re building, they often change people’s lives or provide a future for a business before anyone else was willing to take a chance. They may also seem other-worldly.
But they’re not as out of reach as you might think.
Sites like AngelList provide an easy way to connect with investors looking for the next big thing. You can also find them through your local chamber of commerce. If you’ve got a promising, thoughtful business plan, don’t overlook the opportunity to work with an angel investor—just make sure you’re willing to give up some of your equity.
You’ve probably heard of sites like Kickstarter and GoFundMe, which provide an infinite (and indeterminate) outsource for securing funding for your business or product goal. This can be a great way to gain traction on a business before incurring overhead costs and can be a gateway to securing professional financing down the line.
The downside is that the results are in no way guaranteed: You could pour your heart into marketing your crowdfunding campaign, but it won’t ensure that the dollars will pour in. You will have to rely on the finicky wallets of the public.
Student Loan Payments
If you’re still in school and feeling really scrappy, it’s possible to use money provided through your student loans to start your business. This means that while you’re still receiving loans, you can opt to receive more than you need or the maximum amount your lender provides you.
Charisse Conanon on Credit.com can vouch for this method: “My student loans had a 6.8% interest rate—more than three times lower than the credit card rate. While my classmates used their student loan checks to pay rent for posh apartments, I lived meagerly and allocated some funds for my business. Additionally, borrowing from my student loans didn’t create an immediate bill for me.”
Just be wary—not all providers let you use your student loan money outside of school and cost-of-living needs. This certainly doesn’t sound like the easiest or most accessible route, but it can be an option.
Unfortunately, there’s no option that will magically erase your student loan burden or help you secure financing as an at-risk debtor. The good news is there are some tried-and-true best practices to make your dreams come true as an aspiring entrepreneur.
“Even if you qualify for refinancing, consolidation, or deferral—and especially if you don’t have any outside support—it’s going to be very difficult to start a business while repaying your student loans,” says Inc.com, “but it can be done.”
This may go without saying, but in case it’s not obvious, it’s helpful to live beneath your means. Budget your life appropriately. Rent a small apartment. Find ways to keep your cost of living way, way down. This will only help you be a better business owner in the long run as you learn the annals of managing finances.
Never Miss a Payment
Make paying off your debt a major priority. Making all your student loan payments on time will build you a sterling credit score, which lenders will use when considering whether you’re eligible for a small-business loan.
Work with a Mentor or Financial Pro
Get help where you can. “A mentor who has been in your shoes can help you develop a strategy,” states Brianna McGurran from NerdWallet. “A tax professional or financial planner who works with similar businesses also can give you an idea of expenses and profits to expect.”
You can find mentors and professionals through your local chamber of commerce or through the Small Business Administration’s small business counseling program. As a small business owner with a debt burden, anything to get a leg up is a good thing.
Hopefully this information has eased your concerns about starting a business if you hold student loan debt. The point is: Don’t let it hold you back. Aspiring entrepreneurs are the future of business, and people want to help make that happen. Go forth!
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