A college degree can seem like ideal preparation for an aspiring entrepreneur, but if it comes with debt, it can actually be an anchor. That’s what two researchers at Northeastern found. Karthik Krishnan and Pinshuo Wang discovered the unsettling reality that having student loans reduces the chances someone will start a company (for example, up to $10,000 in debt lowers the odds by 7 percent) — and if that entrepreneur does start one, the loans seriously impede the company’s income potential. Krishnan and Wang published these findings in 2018 and have continued to examine this issue (Wang’s now based at the University of South Florida). Their latest work shows that college grads who avoid student loans are more likely to become entrepreneurs and to secure venture capital investment, a sign that investors think their startups could be the next Tesla or Slack.
“Entrepreneurial activities are usually the driver of economic growth,” Wang tells me. “If we’re impacting entrepreneurship [through student debt levels], absolutely we are impacting the economy negatively.”
Even before COVID-19, we were in a startup slump, with a decades-long decline in the creation of new companies. For people of color and women, the path to entrepreneurship has been especially difficult, with funding disparities, bias, and other hurdles. Our country’s racial wealth gap has been a major impediment. Black entrepreneurs, for instance, typically launch a business with a third of the startup capital of white entrepreneurs. When these hurdles are knocked down, we all stand to gain. One team of researchers estimated that if US women launched high-growth firms at the same rate as men, we’d add 15 million jobs in only two years. If we hope to turn around our pandemic-ravaged economy, we’re going to need lots more entrepreneurs.
Conservatives have long maintained that the best way to goose entrepreneurship is for the government to butt out. But a variety of so-called big-government programs such as student debt relief, universal health care, and universal preschool — policies being pushed by progressive candidates up and down the November 3 ballot — have been shown to encourage entrepreneurial activity. This could make a particular difference for underrepresented entrepreneurs.
The government’s role in business building has been demonstrated before. Sunday is the anniversary of President Reagan’s October 25, 1988, signing of the Women’s Business Ownership Act. This bipartisan legislation recognized that women entrepreneurs faced systemic roadblocks and took steps such as barring the requirement for a male cosigner on a woman’s business loan. It also opened training-focused Women’s Business Centers, affiliated with the US Small Business Administration, around the country. Women’s entrepreneurial levels increased in the following years, but work remains.
Student debt is an obvious current problem for government to address, in part because state and local funding cuts to public higher education have made a college education an enormous financial burden, especially for people of color and those who have low incomes. The cost of a degree is more than twice as high as a generation ago. As the price has gone up, so, too, have loan amounts. Women owe almost two-thirds of the outstanding student debt in our country, and Black students borrow more than white students. Black women hold the most student debt of all — a mean of $37,558, compared with $35,665 for Black men, $31,346 for white women, and $29,862 for white men. Women also take longer to pay back their loans, in part because of the gender pay gap. The situation has led a number of politicians, including Joe Biden, to push for canceling student debt and lowering the cost of college in the first place. Senator Elizabeth Warren tells me she sees this debt relief as unlocking the entrepreneurial potential for young people of color, writing in an e-mail that it’s one of several “big, structural changes to address the legacy of government-sponsored discrimination and negligence that created the Black-white wealth gap.”
Other public programs, such as universal health care, have been shown to move the needle on entrepreneurial activity. Researchers discovered that self-employment rates jump significantly during the month when a worker turns 65 and qualifies for Medicare, in ways that can’t be explained by other factors such as retirement. Another researcher found that countries that invest in robust work-family policies such as subsidized child care see more women starting scalable businesses and creating more jobs than countries that skimp on these policies, such as the United States. Even access to food stamps has been shown to let people direct their time and savings toward starting a business.
Yes, unnecessary government rules and regulations can smother new companies. But again and again, the evidence shows that policies that offer people resources and a safety net do the opposite. They give entrepreneurs the opportunity to build something big.
“Starting your own business is hard — and it’s especially hard for women and people of color,” Warren notes. Yet targeted investments and policy decisions can move us “closer to an America where everyone has an equal opportunity to succeed.”
Susanne Althoff, an assistant professor at Emerson College and former editor of The Boston Globe Magazine, is the author of the new book Launching While Female: Smashing the System That Holds Women Entrepreneurs Back. The Somerville Public Library is hosting a free virtual book talk with Althoff on Wednesday October 28 at 7 p.m. Send comments to email@example.com.