Although millennials are often described as an entrepreneurial generation, research shows that student loans stand in the way for many budding business owners. According to Karthik Krishnan, an associate professor of finance at Northeastern University, graduates with $30,000 or more in student loans are 11% less likely to start a business than their debt-free counterparts.
Starting your own business can be risky and might require start-up capital you don’t have if you’re paying off a hefty student loan bill each month. Likewise, it can tough to secure a business loan to get that capital if you already have a lot of debt (though there are other ways to fund your enterprise).
But the entrepreneurs below figured out how to manage their student loans without letting their dreams of starting a business fall by the wayside. Here’s how they started companies while managing their student debt, along with their advice for other aspiring entrepreneurs looking to do the same.
If you owe a lot in student loans, you might be facing a huge monthly bill that makes starting a business feel impossible. But by putting your federal loans on income-driven repayment, you could free up more of your cash flow to put into your new venture.
That’s how Tina Willis, an Orlando, Fla.-based personal injury attorney who runs Tina Willis Law, dealt with the obstacle of her student loans.
“Back in 1997, I graduated from law school with approximately $80,000 in student loan debt, after overcoming childhood poverty to attend college and law school,” said Willis. “I would encourage all of those with large student debt to…keep their payments under control by using income-driven repayment plans.”
Income-driven plans such as Income-Based Repayment and Pay As You Earn (PAYE) adjust your monthly payments to between 10% and 20% of your discretionary income. If you have a remaining balance after 20 or 25 years (depending on the plan), it will be forgiven.
“Do not delay setting up income-driven plans, because these [federal programs] provide that your loans will be wiped away after [20 or] 25 years, but only for the time that you were actually registered under the income-driven plan,” Willis said.
That said, income-driven plans do come with a downside: the accumulation of interest. By stretching out your repayment terms, your loans will accrue a lot more interest over the years. That’s why Willis recommends paying off as much interest as you can.
“Compound interest can ruin your life because $80,000 can quickly become many hundreds of thousands of dollars,” she said. “Even when I had no money, I was always careful to make sure every repayment option that I chose … didn’t compound interest. When I finally earned enough money to pay my student loans, at least I didn’t have to pay more than the original principal.”
Although income-driven plans aren’t going to help you shed your debt anytime soon, they could help you lower payments while you invest in your business. Once you start making revenue, you could increase payments to get out of debt sooner.
Although an income-driven plan can help you manage federal student loans, it won’t apply to private student loans. If you’ve got private student debt, consider refinancing as a strategy for adjusting your monthly payments.
That’s the approach Avivit Fisher took when working on the launch of REdD Strategy, a marketing research and strategy firm for therapy practices.
“A few years ago we [Fisher and her husband] decided to refinance the loan and reduce the payment to the minimum, which prolonged it to another 10 years,” said Fisher. “It was much easier to operate a business knowing that the monthly payment for my student loan is not very high and doesn’t take a huge chunk out of the family budget.”
Thanks to refinancing, Fisher was able to reduce the monthly payment on her $80,000 in student loans. When you refinance your student loans, you can choose new repayment terms, typically between five and 20 years.
Choosing a longer term for your loan could lower your monthly payments and free up more cash flow for your business. Of course, extending your loan terms always runs the risk of paying more in interest, so you’ll have to be comfortable with this trade-off.
You also must be cautious about refinancing federal loans with a private lender, as it will mean you lose eligibility for federal protections, such as income-driven repayment and federal forgiveness programs.
But if you’ve thought through the pros and cons — and have the credit and income to qualify (or a cosigner who does) — then refinancing your student loans could be a savvy choice as you work on starting your own business.
Along with lowering payments through income-driven repayment or refinancing, you might also consider pausing payments completely while you get your business off the ground. That’s the approach Chaz Van de Motter, who runs the digital marketing agency Elite Marketing, took when starting his company.
“I accumulated a little under $40,000 in student loans during my time in college,” said Van de Motter. “In order to finance my business, pay my bills and be able to survive, I decided to put my student loans in forbearance for a year.”
Forbearance can pause payments on federal student loans, but interest will continue to accrue. Before postponing payments, Van de Motter estimated how much interest would accrue to ensure this approach was affordable.
“I figured [a year] would buy me enough time to figure out my finances without breaking the bank on interest,” he said. “I believed that I could start a business and begin paying myself the salary I was already making and build off of that.”
Van de Motter’s projections were accurate, and he was able to pull his student loans out of forbearance after a year and resume full repayment. (You can crunch the numbers for your loans too — try our repayment calculator to get an idea of the costs.)
Given his experience, he advises other entrepreneurs to devise a solid business and revenue strategy before pausing payments on their loans. “I recommend to any entrepreneurs with student loans to understand your target market and began executing a business strategy before going all in,” said Van de Motter.
He also recommends saving enough to cover a few months of student loan repayment before you have to rely on your own income. By buying yourself some time with forbearance and savings — while keeping an eye on interest accumulation — you can focus on generating revenue from your new venture.
Some say it takes money to make money, but Laura Gariepy, founder of content creation company Every Day by the Lake, recommends starting a business with low start-up costs. (Full disclosure: Gariepy has also contributed to the Student Loan Hero blog as a writer.)
“Choose a business with low overhead and start up costs,” said Gariepy. “This will allow you to get going without taking on any (or little) additional debt.”
If you can start your business online and use content marketing to attract clients, your initial costs will be very low.
“Be stingy and minimize your business expenses,” advised Gariepy. “The internet makes it easier than ever to start a business that’s cheap to start and run and is location-independent.”
By keeping costs down, you hopefully won’t have to take on debt to start your business. That said, it might be some time before you’re making enough money to pay off your current debt, which is a challenge Gariepy faces with her $160,000 in student loans.
Whether or not you’ve got similar obligations, Gariepy also recommends saving money before quitting a job to focus on your business.
“Have a cash reserve before taking the plunge,” she said. “This is a good idea regardless, but even more so when large liabilities are involved.”
By following her own advice, Gariepy has managed to turn her freelance business into a full-time living and expects to double her income by year’s end.
Starting a business and paying off student loans both cost money, which is why consultant Brian Harrington recommends finding ways to save in other areas of your life, such as your rent, food or transportation.
“One way I have been able to overcome the financial obstacle of having student loans is to drive an old car so that I don’t have a car payment every month,” said Harrington. “This means that my student loan is essentially my car payment, and then I am able to pour [the rest of my available] money into my business.”
As an entrepreneur, managing your money is a key part of your job. So apply the same principle to your daily life by designing a budget and keeping tabs on your major spending categories.
Even if you start to make more money, avoid the temptation to upgrade your lifestyle until your revenue is on solid ground and you’ve got a firm handle on student loan repayment.
Although starting your own business can be a hard road to follow, especially if you’ve got student loans to pay, it’s not impossible.
These entrepreneurs weren’t willing to let their student debt stand in the way of their goals, but they didn’t quit their day jobs right away, nor did they take the leap without a plan. Instead, they took advantage of strategies such as deferment and income-driven repayment, kept their spending as low as possible, and designed a thorough business plan.
In fact, student debt can even be a positive force, inspiring business owners to work hard and get past their financial hurdles. As REdD Strategy’s Fisher puts it: “I would be able to invest the money in my business if I didn’t have to repay my loan. But I also find the debt repayment to be a good motivator in selling my services.”
By considering the advice from the business founders above, you’ll have a better chance at succeeding as an entrepreneur without your student loans getting in the way.
The information in this article is accurate as of the date of publishing.