The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship?

61 Pages Posted: 29 Mar 2015 Last revised: 1 Nov 2015

Karthik Krishnan

Northeastern University

Pinshuo Wang

Northeastern University - Department of Economics

Date Written: October 1, 2015

Abstract

Student loans can impose a significant cost of undertaking risky endeavors such as starting up businesses. Using data from the Survey of Consumer Finances (SCF), we find evidence supportive of recent policy decisions to reduce the burden of student debt to promote entrepreneurship. We find that student debt is negatively related to the propensity to start a firm. Moreover, conditional on starting up a firm, individuals having more student debt have less profitable and smaller firms. An exogenous shock to student debt due to the Higher Education Amendments of 1992 negatively impacts entrepreneurship rates for students already in four-year college at the time of this regulation. The negative relation between student debt and entrepreneurship is stronger when the individual is younger, works in a high-technology industry, and has a dependent spouse. Further, student debt reduces the tendency of high-reward and high risk-preferring individuals to take on entrepreneurial ventures. Entrepreneurs with more student debt are more likely to fall behind on their student debt payments, and this relation is mitigated by the extent of success of their startup. Our evidence indicates that student debt may inhibit entrepreneurship by reducing the expected payoff of these ventures to individuals by exacerbating the effect of negative outcomes on the individual.

Suggested Citation

Krishnan, Karthik and Wang, Pinshuo, The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship? (October 1, 2015). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2586378. Available at SSRN: https://ssrn.com/abstract=2586378 or http://dx.doi.org/10.2139/ssrn.2586378

Karthik Krishnan (Contact Author)

Northeastern University ( email )

360 Huntington Avenue
414C Hayden Hall
Boston, MA 02115
United States
617-373-4707 (Phone)

HOME PAGE: http://www.northeastern.edu/kkrishnan

Pinshuo Wang

Northeastern University - Department of Economics ( email )

360 Huntington Ave
310A Lake Hall
Boston, MA 02115
United States

HOME PAGE: http://pinshuowang.weebly.com

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