Check out this great article found on USAToday.com
Picture a young person — let’s call her Jane — starting college in 2007. Surveying the slowing economy, she congratulates herself on her auspicious birth date. She won’t graduate until at least spring of 2011. By then, everything will be fine! Whoops.
As she languishes in underemployment, Jane gets an idea: If she can’t get a job, she’ll make a job. A recent Kauffman Foundation-funded poll found more than half of millennials would like to start a business — anything from designing iPhone apps to painting houses.
Except that launching a business is a risk, and like the average student these days, Jane has close to $30,000 in loans. They are now coming due. So she puts her entrepreneurial dreams aside to bartend by night and hawk lattes by day, mostly for the cash flow. It’s understandable for Jane, but too bad for society as a whole. Because there’s a simple way to help young people become entrepreneurs despite their loans, if we recognize that starting a business is a public service — and reward it as such.
Helping loan-strapped students
There’s no question that the $1 trillion in outstanding student loan debt in the U.S. is causing serious economic anxiety. “It’s where the mortgage market was a few years ago,” says Anya Kamenetz, author ofGeneration Debt and DIY U (a manifesto for tackling the high cost of education). That’s as scary as it sounds, with plenty of blame to share. Students over-borrowed, and banks lent six figures to people majoring in English at schools that graduate fewer than half their students in six years. U.S. taxpayers are backstopping many of those loans, and the percentage of students defaulting in the first two years is rising (from 7% in 2008 to 8.8% in 2009). Something has to give.
Recognizing that, the federal government created an “Income-Based Repayment” (IBR) program a few years ago that caps repayment of federally backed loans at 15% of discretionary income, with outstanding balances forgiven after 25 years. A single person earning $40,000 annually would pay approximately $300 a month, max.
But with little marketing, few people subscribed. In October, the White House, eyeing growing protests from the Occupy Wall Street movement and elsewhere,decided to trumpet this option more loudly and announce broad eligibility for new loans (basically, for current students) that would cap repayment at 10% of discretionary income, to be forgiven after 20 years. People who earn low incomes (under $20,000 per year) can put off payments.
Intriguingly, the Obama administration is marketing IBR specifically to potential entrepreneurs as a way to boost job creation (though anyone can apply). The Small Business Administration‘s website touts the “Student Start-Up Plan,” enticing people to “Defer Loans. Not Entrepreneurship.” This is quite smart; even if a small business produces revenue, its owner can easily have income under $20,000 as she re-invests incoming cash. IBR means she doesn’t have to worry about student loans on top of bank loans or start-up costs. “It’s a perfect setup,” says Scott Gerber, head of the Young Entrepreneur Council and co-founder of Gen Y Capital Partners.
How it would work
But if we truly believe, as the SBA claims, that “young entrepreneurs are key to our economic success,” then we can do better than 10% and 20 years. We already do better for some people. The federal government also runs a program called Public Service Loan Forgiveness for people who work for government agencies and certain non-profits. Aside from capping payments, the government forgives outstanding balances after 10 years — a major boon if you have $50,000 in loans and earn $30,000 a year. The recipients are deserving, but why is someone who works for a non-profit after graduation more deserving of loan forgiveness than someone who creates the wealth that allows people to donate to non-profits in the first place? Starting a business “is doing a service to the economy, going out and creating jobs,” Gerber says.
If we want to sweeten the deal for Jane and her ilk, we should give them the same loan terms as public servants. And not just for current students taking out new loans, but for a broad swath of people willing to start businesses.
There could, of course, be abuse. It’s pretty easy to create a “business” for tax purposes, and people could create businesses (e.g. “Jane, LLC”) for loan purposes, too. A good policy could set qualifying benchmarks for business growth or perhaps use existing SBA standards to establish business legitimacy. One would also hope that within a few years, a new business would kick off enough cash that loan caps and forgiveness would not be necessary. But current efforts to boost job creation (like home weatherization programs) have been prone to abuse, too. You could restructure a lot of student loans for the $535 million we taxpayers spent propping up Solyndra. Giving entrepreneurs better loan terms subsidizes new business growth without choosing favorites. It would make those first boot-strapping years easier, and long-term loan forgiveness, when necessary, would be a nice way of thanking people for giving it a whirl.
Can’t find a job? Do something entrepreneurial for a decade and, afterward, you’ve got a clean slate to try something else. Or maybe our Jane will start the next Google. In that case, a few thousand dollars in loan help could be the best investment the taxpayers ever make.
Laura Vanderkam, author of the forthcoming All the Money in the World, is a member of USA TODAY’s Board of Contributors.
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