The Impact of Student Loan Debt on Small Business Formation
Brent W. Ambrose
Pennsylvania State University
Federal Reserve Banks - Federal Reserve Bank of Philadelphia
Federal Reserve Bank of Philadelphia
March 29, 2014
Small businesses are the backbone of the US economy and account for approximately half of the private-sector economy and 99% of all businesses. To start a small business, individuals need access to capital. Given the importance of an entrepreneur’s personal debt capacity in financing a start-up business, student loan debt, which cannot be discharged via bankruptcy, can have lasting effects later in life and may impact the ability of future small business owners to raise capital. This study examines the impact of growth in student debt on net small business formation. We find a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for the smallest group of small businesses, those employing 1-4 employees. This is important since these small businesses depend the most heavily on personal debt to finance new business formation. Based on our model, a one standard deviation increase in student debt reduces 1-4 employee businesses by 25 percent on average between 2000 and 2010. The effect on larger firm formation is not significant, which we interpret to mean that these firms have greater access to outside finance.
Number of Pages in PDF File: 30
Keywords: Student Loans, Small Business, Debt
JEL Classification: D12, I22
Date posted: March 31, 2014
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