For recent grads who are having a hard time finding a job, starting up a business would be ideal, save for one thing: their giant student loans.
President Barack Obama yesterday announced more details about his plans to ease federal student loan burdens for low-wage earners like those looking to start a business, join a startup or work for a nonprofit. Though the program would help alleviate the loan burdens of students in general, one of its main goals is to lessen the financial pressures young entrepreneurs face when starting up companies.
Under the plan formally announced yesterday in Denver, starting next year, the President plans to lower borrowers' payment caps to 10 percent of their discretionary income -- that is a person's income after accounting for other living costs. The new measures would also shorten the forgiveness timeline to 20 years from 25 years. So, if someone had $100,000 of federal loans and earned an annual salary of $30,000, that person's monthly payment might amount to $1,150. Through the program, that borrower would pay just $116 a month, and, after 20 years, the leftover debt would be forgiven.
This proposal builds off of the existing Income-Based Repayment, or IBR, option for low-wage earners with federal student loans. The program currently caps federal-student loan payments at 15 percent of discretionary income -- falling to 10 percent in 2014.
Though the data on how much student debt entrepreneurs have upon leaving college isn't known, the overall burden recent graduates faced amounted to an average of $24,000 last year -- surpassing credit card debt for the first time ever. Tack on getting a Master of Business Administration or a law degree, and debt levels rise dramatically.
The result is that many would-be entrepreneurs simply turn away from starting up in favor of a steady paycheck -- especially considering that in the early days of starting a company revenues can be slim, if present at all. Though some entrepreneurs like Jason Rivera have chosen to defer their student loans.
Upon graduating from Lehigh University in Bethlehem, Pa., Rivera began paying back student loans of more than $100,000. Though steep, his $700 monthly loan payment was manageable as he worked for an advertising agency in New York. But entrepreneurship beckoned, and he spent the past year building Live Life Every Day LLC., a brand of organic clothing based in Piscataway, N.J. He could no longer meet his loan payments and so the 22-year-old decided to seek a deferral. The deferral for his federal loan, which accounts for roughly 20 percent of his overall debt bill, lasts for six months. For the balance, Rivera has two private loans, which he can only defer for three months at a time at a cost of $50 each.
This strategy does help alleviate some of the pressure startup entrepreneurs face, but it's not ideal by any stretch. By staving off loan payments, owners are allowing the interest on their loans to build -- making paying off their debts harder to muster as time goes on.
Of course, the President's new plan only addresses federal student loans -- not those issued by private institutions, which are common among students graduating from pricier universities and graduate education programs. Sam Gordon, the 27-year-old co-founder of the Oona, a smartphone-stand maker, pays around $800 to $900 a month in student loan payments, and he lives in New York City, which is notorious for its sky-high cost of living. "I pay the same amount in school loans that I pay in rent," he says.
If the University of Southern California grad participated in the program, he would be eligible to reduce just $7,000 of his total $120,000 student loan debt, as the rest is made up of private loans. Gordon would consider participating in the program, but it likely wouldn't do that much good, he notes. "Being an entrepreneur can be frustrating at times…but it's a sacrifice, and I knew that."
For more information on the IBR program, the U.S. Small Business Administration launched a new website where entrepreneurs can peruse case studies and calculate what their loan payments might look like.
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Comments:
Though the program would advice allay the loan burdens of acceptance in general, one of its capital goals is to abate the banking pressures young entrepreneurs face if starting up companies.
Thanks for the information. I’m really glad that you share your ideas about this. I must relay this ideas to my friends.
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Sooner or later, we all have to pay a price to get what we desire out of life. Learning to sacrifice (lifestyle, comfort) while staking your claim in the world - is a good, moral exercise. Thick skin and strength of character is earned, not handed out by government programs. Character is what our country lacks. Not more assistance programs running on the fumes of fiat currency. Its unsustainable.
Astute observations Patrick and well written.
Amen - lets hear it for those disciplined enough to self-study their way to competence and cash flow. Most recent college grads I interview have a piece of paper and limited real world skills. The world doesn't owe you a living, new cars, debt forgiveness or anything of the sort.
That, everything else will definitely adhere to. As you recognize the people of the house let, the next thing to consider is area.
Great!
always secure for the term that you have , make sure that your step can be easily to carry to have it and make it better most especially in loan terms.
I see your point. However, where did your son go to college and for how long? You see, for those of us that go to schools that cost $30K+ a year in tuition alone, no part time job is going to cover the cost. Its great that your son paid for his degree in full, awesome. But like you said, everything has consequences. How much is your son making now?
I worked and put myself through college in the evenings. No one helped me but me! I personally think that people need to understand that no person will truly appreciate what they have attained in life if the government bails them out. Granted, in todays dollars, education has gotten expensive but so has everything else. Its all relative.
I Decided to stay home and take online Classes while starting my business. NO ONE helped me and that was a sacrifice that i decided to take, and would not take back. For me this is totally bullsh&#
All of this 'debt forgiveness' and 'debt restructuring' being done everywhere is creating tremendous moral hazard. If someone cannot manage their own personal finances, properly allocate capital to generate a return on and the return of their capital - how can they possibly become a successful entrepreneur? The answer is they cant! All they can do is go out into the business world and make a giant mess. This is precisely what has been happening for the last 10 years. We as a society have been subsidizing bad decisions and reckless behavior to the point where it is considered mainstream and the business environment is contaminated with well-intentioned fools who have no comprehension of the basics.
HHMmm...lets see now, Steve Jobs and Bill Gates did not even go to college and we all know what failures they were. If "free rides" are going to be provided it better be for something constructive and financially rewarding and not PE, Underwater Basket Weaving, or some other "feel good" liberal cause.
I’m tired of hearing from more and more people who have $100,000 in student loan debt but who have no focus for meaningful work. They have a nice piece of paper and no identifiable skills for generating income. There are basic techniques for getting the education that can transform your success…that don’t take 4 years or require $100,000. “A single conversation with a wise man is better than ten years of study.”- Chinese Proverb
Part of me loves this solution to help support young entrepreneurs, but I think there will be huge unintended consequences. All of a sudden every one will become an "entrepreneur" to take advantage of this deal, but may not have a viable business model. There are certainly some other ways for universities to spur entrepreneurship like - http://blog.stringhub.com
Sorry, but this program has to be paid for by someone eventually and that someone will be those successful entrepreneurs.
What a joke! And to think this is an article in a business magazine? Remember, every dollar ‘forgiven’ is paid by somebody. Perhaps the American taxpayer? My son worked while going to college. Even when he studied abroad for a year, he worked in England. He realized if he graduated with a financial rock around his neck, i.e. a large student loan, it might limit his choices for getting his foot in the door at an entry level job in his field. At some point, people need to realize their decisions have consequences.
This is so encouraging to see! I've had lots of discussions with folks about how student loan debt could produce its own brain drain by discouraging entrepreneurial minds (in favor of a steady paycheck). Here's hoping for more of this type of legislation!