The Effect of Student Loans on Entrepreneurial Firm Risk-taking, Performance, and Access to Venture Capital with Implications for the Biden Administration’s Student Loan Forgiveness Program

Abstract

We analyze the effect of student loans on entrepreneurial firm risk-taking. Assuming risk-aversion declining in net wealth, we develop testable hypotheses for student loan reduction on entrepreneurial firm riskiness; access to venture capital (VC) investment; and firm performance. Using some universities’ changes to “no-loan” financial aid policies as a natural experiment, we test these hypotheses and find the following: Students graduating under no-loan financial aid policies start more entrepreneurial ventures; such ventures are riskier (higher IPO or failure likelihood); have greater likelihood of receiving VC-backing and larger VC investment; and have better sales, employment, innovation output, and number of trademarks. Based on our analyses, we also estimate the entrepreneurial benefits of the Biden Administration’s student loan forgiveness program.

Keywords: no-loan Financial Aid Policy; Entrepreneurial Risk-Taking; Student Entrepreneurship; Venture Capital Access

JEL Classification: G24, G51