The Impact of Student Loan Debt on Small Business Formation

32 Pages Posted: 22 Jul 2015  

Brent W. Ambrose

Pennsylvania State University

Larry Cordell

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Shuwei Ma

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: July 2015

Abstract

Small businesses are the backbone of the U.S. economy and account for approximately one-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 startup business, student loan debt, which is difficult to discharge via bankruptcy, can have lasting effects and may have an impact on the ability of future small business owners to raise capital. This study examines the impact of the 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 one to four employees. This is important since these small businesses depend heavily on personal debt to finance new business formation. Based on our model, an increase of one standard deviation in student debt reduced the number of businesses with one to four employees by 14% on average between 2000 and 2010. The effect on larger firm formation decreased with firm size, which we interpret to mean that these firms have greater access to outside capital.

Keywords: Student Loans, Small Business Finance, Debt Capacity

JEL Classification: D1, I22, I25, I28, H31, R2

Suggested Citation

Ambrose, Brent W. and Cordell, Larry and Ma, Shuwei, The Impact of Student Loan Debt on Small Business Formation (July 2015). FRB of Philadelphia Working Paper No. 15-26. Available at SSRN: https://ssrn.com/abstract=2633951 or http://dx.doi.org/10.2139/ssrn.2633951

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Larry Cordell

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Shuwei Ma

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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