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Weighing debt’s toll on entrepreneurship

Are students paying off loans less likely to initiate startups?


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What effect does debt have on college graduates’ entrepreneurial aspirations? If college students take out loans to pay for their education, will they be less likely to start a new company because they’re so worried about paying off their debt?

These questions generate passion on both sides of the issue.

“For way too many young people, they’re graduating with these piles of debt and they have not gained any skills in their education that they can use to pay down their debt,” said Vic Ahmed, co-founder and chairman of the Innovation Pavilion, which describes itself as an “ecosystem for entrepreneurs.” Ahmed said that millennials likely will change their career an average of five times during their life; how, he asked, will they be able to pay off the debt they will accumulate educating themselves for these careers?

“What kind of ability are we giving these people so they can compete?” Ahmed asked, arguing that most of today’s higher educational institutions don’t teach students the skills they will need to launch their own companies or work in startup environments. Further, he said, some students, like those studying to be doctors, can amass up to $650,000 in student loans — thus making it imperative that they immediately find lucrative jobs (and probably not in the nonprofit sector). “I think this is by far the biggest challenge for our nation,” Ahmed said.

Innovation Pavilion is working to address the situation. Ahmed said his organization is tackling the “curse of college debt” with classes on entrepreneurship and technical training alongside courses on life and leadership skills and problem- and project- based learning. “We have a major initiative to transform education,” Ahmed said.

Two-Sided Coin

On the other side of the debate — whether student debt inhibits entrepreneurship — sits Tom Duening. Duening is an associate professor at the University of Colorado at Colorado Springs and the director for the school’s Center for Entrepreneurship.

Duening said his school’s students are leaving the university with an average of $17,000 in student debt. “That to me does not seem like a burden to preclude someone from being an entrepreneur,” he said.

“There’s never a perfect time to start a company,” he added, noting that, “We have a very forgiving society. There’s a lot of leniency and flexibility … for paying back student debt.”

Moreover, Duening said, a college degree is “totally worth it.” He pointed to findings from the U.S. Census Bureau showing that the projected lifetime earnings of a high-school graduate are around $1.3 million, but the same number for the average student with a master’s degree is $2.8 million. That figure balloons to $4.1 million for those with professional degrees.

In fact, Duening argued that “the bigger the debt burden, the more likely [a student] needs to be an entrepreneur in order to pay down the debt.” He added: “I feel sorry for those folks who have taken on huge amounts of debt and don’t see the entrepreneurial opportunities out there.”

That said, Duening agreed that everyone should learn the principles of entrepreneurship, either in school or outside of it. Indeed, Duening’s Center for Entrepreneurship is “dedicated to promoting entrepreneurship, venture creation, and economic development in the Southern Colorado region.”

Numbers Game

“This is a world for entrepreneurs,” he said.

While Duening and Ahmed come down on either side of the student debt-vs-entrepreneurship question, one faculty member in Colorado State University’s Management Department has put some numbers to it. Professor Timothy Galpin conducted a survey of 56 students enrolled in junior- and senior-level entrepreneurship courses at the university, asking them their estimated level of student loan debt upon graduation, and how much they felt that their debt repayments would be a constraint to pursue a startup venture. (Not surprisingly, Galpin teaches entrepreneurship and business strategy.)

On average, Galpin’s survey respondents expected $14,384 in student loans on graduation, and “the higher the average estimated debt upon graduation, the greater the perceived constraint to pursuing a startup venture,” he said in his findings.

Specifically, the respondents who indicated that their total estimated student loan debt upon graduation would pose “little constraint” on their entrepreneurial plans had an average of $11,056 of total estimated student loan debt upon graduation.

The respondents indicating “some constraint” on their empire-building dreams had an average of $31,286 of debt.

And those respondents who said that debt would be a “large constraint” to risk-taking had an average of $33,500 of total estimated student loan debt upon graduation.

“I feel like I would not be able to start a business until I completely paid off my student loans,” noted one unnamed student in the survey.

Resourceful Allocation

“My parents are paying! Thank God!” said another.

“On some level, I’d say that high student debt can impact whether someone chooses to become an entrepreneur. It’s a resource allocation issue. If you’re talking personal resources, you only have so much, and you have to make choices,” said Robert Cartelli, Colorado Mountain College’s business and entrepreneurship faculty. “With student debt, less is better than more. I don’t think anyone will argue with that. For the vast majority of people, though, having a college degree is important because your lifetime earnings jump at each level of education you receive.”

Added Cartelli: “You shouldn’t take on debt for the sake of taking on debt. You have a responsibility to be smart about it.”

“Certainly student debt can prevent a student from embarking on many new things, including entrepreneurial ventures, or buying a car or a home. This is why many colleges, including Colorado Mountain College, have intensified our focus on steering students away from loans if possible,” said Lin Stickler, Colorado Mountain College’s vice president for student affairs.

Stickler said that CMC’s financial aid advisors educate students on the long-term impact of obtaining loans. She said that CMC has also created a back-end scholarship specifically earmarked for loan repayment for graduates who have incurred federal loan balances while at the college.

According to a 2014 report from the Colorado Department of Higher Education, the average student loan debt among graduates of Colorado’s colleges and universities has risen in recent years, but the share of loans relative to other types of aid has decreased. At Colorado public institutions, 70 percent of students graduated with debt and the average debt is $26,057 for a bachelor’s degree.

“Financial aid is essential for removing financial barriers to college for students from low- and middle-income households,” the report concluded. “In recent years, the scope and reach of financial aid in Colorado has undergone significant changes. Today, more students than at any other time in the state’s history receive some form of financial assistance, and students’ dependence on loans to meet rising college costs continues to increase.”

Thus, Colorado’s students and universities continue to look for options. For example, the University of Colorado at Boulder two years ago launched the Catalyze CU program. Mark Etem, the program’s director, explained that Catalyze CU is a nine-week startup accelerator that combines mentorship with equity-free grants for students and faculty.

“I haven’t had conversations specifically around student debt,” Etem said. Those involved in the Catalyze CU program are “just passionate about the [startup] idea and making something.”

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Mike Dano

Mike Dano is a freelance writer and the executive editor for the Telecom Group for FierceMarkets, which includes FierceWireless, FierceTelecom and other publications. Mike has been a journalist for more than a dozen years. Follow Mike @mikeddano and on LinkedIn. Mike is based in Arvada.

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