Virtually everyone in this country agrees that an uptick in new business creation is essential to solving our deep economic and employment problems. Unfortunately, there’s a huge obstacle standing in the way: U.S. graduates owe nearly $1 trillion in student loan debt, a burden that’s preventing thousands of Millennials from taking an active role in job creation. Wednesday’s announcement by the Obama Administration of a program to lighten student loan obligations has the potential to unleash our most vital entrepreneurial spirits.
The graduates of 2011 are the most indebted in history, with an average debt load of $27,300. (The class of 2012 is expected to surpass that amount, and the classes of 2007-2010 aren’t far off.) In order to begin repaying those debts after graduation, many resort to underemployment far outside their fields of study, a move that sets them back financially for years, lands many of them back home with their parents, and pushes entrepreneurial dreams to the back burner, often forever.
Perhaps even more economically damaging in the long-term, many graduates simply can’t keep up with their payments. The U.S. Department of Education reports that college loan default rates have risen to 8.8 percent. These defaulting borrowers are likely to find that black marks on their credit records limit future access to traditional bank loans, business credit cards, and growth capital.
Meanwhile, those graduates who do manage to start a business often find themselves in a cash crunch, as their available startup funds are siphoned off to pay loan debt.
Given the current state of our economy, we simply cannot afford to have any entrepreneurially minded individuals forced to the sidelines this way — let alone the most educated and energetic among them. Thus the reason that so many members of the entrepreneurial community will welcome the announcement, which strengthens an existing program known as Income Based Repayment, or IBR.
Created by the Bush Administration in 2007, IBR enables graduates with high debt levels relative to their incomes to cap their monthly federal student loan bills. The existing law sets the cap at 15% of income; extends the payment period up to 25 years; and forgives any debt remaining after 25 years. The new version will, starting in 2012, lower monthly payments to 10% of income and forgive the debt after 20 years. Plus, individuals whose incomes are less than $20,000 per year will pay $0 in monthly payments. Because the interest tolls over a longer period of time with IBR, subscribers can end up paying more for their loans over time, but it enables borrowers to more easily manage their loan repayment, maintain a decent standard of living, and – here’s where my interest mainly resides – use the difference as startup and operating capital for a new business.
Historically, IBR has been effective but undersubscribed due to a lack of promotion by colleges and government alike. The Obama Administration is now bringing IBR front and center as part of a new wave of reforms. Government agencies will more actively promote IBR to entrepreneurs through the Small Business Administration and other organizations; make program information and registration more accessible; and simplify the application process.
What I find especially encouraging is that IBR is an immediately deployable solution that transcends many of the political debates that have held back previous rapid responses to fix economic problems. With IBR, nobody can accuse the government of trying to pick winners or otherwise subvert market forces, as the plan promotes youth entrepreneurship blindly by simply removing a major barrier to entry for any young person who wishes to transition into self-employment.
Another strength of IBR – or “Pay As You Earn,” as the president has renamed it — is that other programs, both public and private, can build upon it. My own Young Entrepreneur Council will soon launch Gen Y Capital Partners, an early-stage investment company that will utilize the IBR program as part of its business model. After selected startup founders subscribe to IBR, Gen Y Capital Partners will cover their remaining federal student loan debt obligations for up to three years, allowing them to fully concentrate on their ventures during the startup phase rather than seek out traditional employment or fear default. Gen Y will also connect founders with YEC mentors and potential co-investors; provide access to entrepreneurship education courses; and eliminate living expenses by having select founders live rent-free on partner college campuses. My hope is that Gen Y Capital Partners will lead the way for other innovative public/private partnerships to emerge.
The bottom line is this: The current economic crisis will cause the U.S. irreparable harm if it prevents an entire generation of would-be entrepreneurs from starting businesses today, or in the decades to come. I happen to believe that our nation’s financial woes can only be solved if the government and the private sector work together to activate new entrepreneurs through innovative programs. IBR isn’t going to accomplish this by itself, but it’s certainly a very fine start.