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Student debt is killing entrepreneurship

STARTING DOWN, NOT UP

This year, about 1.9 million Americans will get bachelor’s degrees and about 200,000 will get Masters of Business Administration, or MBA, degrees—a sharp increase in the number of college grads and MBA sheepskins since 2000, thanks to a greater availability of student loans.

But even as these loans have helped create the welcome boom in degrees, they’ve had an unintended consequence. Relatively few of those graduates are becoming entrepreneurs.

While millennials— the 73 million Americans born between 1980 and 1996—may be commonly associated with startups, the percentage of people under 30 who own their own business has fallen by 65% since the 1980s. Millennials have been called the least entrepreneurial generation in recent history.

The dearth of young people starting their own businesses is part of a worrisome overall decline in initial public offerings, or IPOs, since the dot com boom at the turn of the 21st century and a general slowing in startups that’s rebounded only modestly since the financial crisis and the Great Recession. A report this winter in the Financial Times noted, for instance, that even among MBAs, the number going directly to startups is falling fast. Until this year, about 20% of former MBA students surveyed for the FT’s annual global ranking of business schools had started a business within three years of graduating. The proportion starting businesses in the FT student sample peaked at 22% in 2015. But, this year, that figure fell to 16%. There’s nothing wrong with wanting to get some corporate experience under one’s belt before venturing out on one’s own, but the overall trend is worrisome.

Ironically, millennials say they want to start their own companies. By some count, 60% percent of millennials consider themselves entrepreneurs, even if few of them are. One poll found a majority of millennials would like to own a business someday but fewer than 2% are self-employed. And, of course, articles proclaiming today’s youth as the startup generation are ubiquitous even if the facts don’t merit them.

So what accounts for the gap between millennials’ expectations of themselves and the reality that few of them are starting businesses? Surely, student debt is part of the issue. Nationally, student loan debt is now around $1.48 trillion, an astonishing $620 billion more than total credit card debt. That’s up more than 150% in a decade. A full 70% of college seniors graduate with debt and almost 30% of federal direct student loan dollars are in default, forbearance or deferment. Between 2004 and 2014, there was an 89% increase in the number of student borrowers as well as a 77% increase in the average balance held by them. It’s no wonder then, that according to The Millennial Economy, a survey sponsored by my firm, EY, 43% of millennials believe student debt is limiting their career options. The 2015 Gallup-Purdue Index, the largest survey ever of US college graduates, found 19% of respondents saying they have delayed starting a business because of their loan debt. That percentage rises to 25% for graduates who left owing more than $25,000.

Even if the barriers to entry of starting a new business today can be low—it’s much easier to outsource everything from payroll or get scalable office space—it’s still harder to do if you have to manage a huge student debt loan payment each month.

It would also help if there was a targeted, well-designed tax policy to ease student debt for would-be entrepreneurs. What about considering employment tax credits for founders to ease the cost of new hires? The federal government offers an array of student debt relief programs for those who go into service at nonprofits or for the government. There’s no reason that the federal government’s Public Service Loan Forgiveness program couldn’t be extended to those who have started registered businesses of a certain size, which are injecting money into the economy.

More corporations can benefit from the examples of companies that give employees time to work on their own projects and encourage an entrepreneurial mindset. Google has famously encouraged its employees to spend 20% of their time working on a passion of their own choosing, and its led to new products such as Gmail. Every company can choose its own path toward encouraging an entrepreneurial spirit, just as sensible government policy and individuals must play a role in fostering startups. We owe our grads no less.

David Jolley is Americas growth markets leader at EY.

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