Is Student-Loan Debt Really Holding Would-Be Entrepreneurs Back?

When Hillary Clinton unveiled a proposal to reduce the student-loan burden on entrepreneurs, higher-education policy wonks responded with a collective eyeroll.

The proposal, part of a technology platform the presumptive Democratic presidential nominee announced on Tuesday, would allow entrepreneurs — and, possibly, their first few employees — to defer payment on their student loans for three years. It would also offer those starting businesses in “distressed communities” or those who form “social enterprises that provide measurable social impact and benefit” up to $17,500 in loan forgiveness after five years.

The idea was quickly pilloried by experts at New America and the Urban Institute. Plenty of others offered skeptical comments to news outlets and on Twitter. (Gawker didn’t think much of it, either.)

OK, so the plan isn’t popular with higher-ed experts. (Mrs. Clinton’s campaign did not comment on the criticisms.) But what problem does it seek to solve, and why exactly are observers dubious about it? Let’s take a look.

Why offer student-debt relief to entrepreneurs?

According to a fact sheet from the Clinton campaign, “barriers like student debt and a lack of access to credit are holding young people back” from their desire to start new businesses. This sounds like common sense. Anyone making student-loan payments has less money to spend on (or invest in) anything else, and someone who’s already in debt may have a harder time securing other financing.

What do we know about the connection between student debt and entrepreneurship?

Let’s start with two trends. Student debt has risen over time — both the share of new graduates who borrow and the average amount they’re in debt have been growing. Ameliorating the burden of student debt has become a mainstream public-policy concern.

Entrepreneurship, meanwhile, has declined. There has been both a long-term decline in the creation of new start-up companies and a cyclical decline because of the recession, says Derek A. Ozkal, a program officer at the Ewing Marion Kauffman Foundation. While there has been a recent uptick in the creation of new businesses, it is not back to where it had been, he says. These days about 400,000 new companies are created a year, compared with 500,000 in the past.

And according to the Kauffman Index, which tracks entrepreneurial trends, the rate of new entrepreneurs — the percent of the adult population who became entrepreneurs in a given month — is lower for people ages 20 to 34 than it was when the index began tracking such figures, in 1996.

Are the two trends related?

That’s a really important question, and researchers have made several attempts to answer it. We’ll start with data from the Gallup-Purdue Index, a national survey of college graduates.

In its 2015 survey, Gallup-Purdue asked college graduates who had borrowed if they had delayed various activities because of their debt. Twelve percent of those who had borrowed up to $25,000 reported that their loans had delayed them from starting their own businesses, as did 25 percent of those who had borrowed more.

The previous year, Gallup-Purdue asked survey respondents if they had started a business and related that answer to their reported levels of student debt. It found that as student-debt levels increased, rates at which people started businesses decreased — even when controlling for age, race, gender, and socioeconomic status, says Brandon Busteed, executive director of education and work-force development at Gallup.

But Matthew Chingos, a senior fellow at the Urban Institute, takes issue with Gallup’s interpretations of its data.

“When you ask people, ‘If you had more money, would you buy more things?,’ of course they’re going to tell you yes,” Mr. Chingos says. But polls reveal what people feel, not the facts on the ground. A poll about climate change tells us whether people believe in climate change, not whether climate change exists. Similarly, polls about what people would do with their money show their beliefs, not how they would actually act in different circumstances.

Imagine a poll that asked, “If you didn’t have your mortgage, would you go out to dinner more often?” Mr. Chingos says. When answering, most people wouldn’t assume that not having a mortgage meant no longer having a house. Similarly, people asked about student debt usually imagine the alternative is having no debt but still having the same level of education. But that’s the wrong comparison, Mr. Chingos says. A college education may be helpful to some would-be entrepreneurs, and even if they had to take on debt to get one, it might still be in their best interest.

Mr. Chingos is also skeptical about how Gallup has interpreted the correlation between debt levels and the share of people who’ve started a business. People who do and don’t go into debt to earn a degree are different populations in other ways, he points out — not least that people who don’t go into debt tend to come from more-affluent families. Such graduates may have more of a cushion that enables them to start a business.

In response, Mr. Busteed says that “no one from Gallup is trying to state from the Gallup-Purdue Index that these are causal linkages.” All survey data has its limits, he says, but it can still provide a revealing perspective. The question about whether borrowers had delayed various activities yielded responses of different strength for different items, he points out (larger shares of respondents said they had delayed getting more education than having children, for instance).

Is there causal evidence that student debt hinders business creation?

As you would expect, that’s harder to come by. In 2014 a conference at the Urban Institute (which received funding from the Kauffman Foundation) brought together experts on student debt and entrepreneurship to try to tease out a connection between rising debt and decreasing business creation. A white paper summarizing the discussion, written by the Urban Institute’s Sandy Baum, found no clear evidence of a causal relationship between the two trends.

OK. But let’s imagine we did know that student debt prevented entrepreneurial activity. Would the new proposal be good policy then?

Student loans might hold potential entrepreneurs back in several ways. Monthly loan repayments could cause cash-flow problems. The full amount of student debt owed might make it harder to get other kinds of financing. Or the loans could have a psychological effect, making would-be business creators more risk-averse and less likely to strike out on their own.

Mrs. Clinton’s proposal seems best poised to deal with the cash-flow problem, though it could arguably ease the psychological one. But the government already offers all student-loan borrowers a way out of the cash-flow problem, Mr. Chingos says: income-based repayment, which ties monthly payments to borrowers’ incomes rather than the amount they owe.

The proposal, Mr. Chingos says, would provide the most help to people who have the most debt, which usually means people who’ve gone to college, finished, and perhaps gone on to graduate school. An emerging consensus among higher-education researchers suggests this is not the population we ought to be worried about when it comes to student loans. Other critics have pointed out that the entrepreneurs who would benefit from such a policy would most likely go on to be financially successful — and would tend to be white and male.

If there is a role for the government to play in helping out new entrepreneurs — which he’s not sure about — Mr. Chingos says it might make more sense for it to offer business loans to entrepreneurs that don’t penalize them for holding student loans.

Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at beckie.supiano@chronicle.com.