How to Start a Small Business When You have Student Loan Debt

Millennials may very well be the “small business” generation. Approximately 30 percent of millennials have already started a small business of their own, compared to 19 percent of baby boomers and 22 percent of generation X. This generation has a can-do attitude and they are strongly attracted to the individualistic nature of small businesses.

Unfortunately, millennials are also a generation defined by student loan debt. Approximately 42 percent of millennials have reported that they, or someone in their household, has student loan debt in their name. This makes the millennial generation something of a paradox: these young people are go-getters who are eager to start and manage their own small businesses, but they also find themselves burdened by debt. However, this doesn’t mean that people with student debt should give up on starting their very own small business. It’s entirely possible to start a small business with student loans in your name.

Applying for a Small Business Loan With Student Debt

Most small businesses require an initial investment to get going. This cash helps to pay for assets, including office space and equipment, along with domain-specific items that a business needs to succeed. It also allows small business owners to send out their first paychecks, before their revenue stream starts to kick in. Finally, many small businesses will want to announce their opening with a strong marketing campaign, and they will need money for that.

No matter how you slice it, you either need to be sitting on some cash, have some friends and family willing to help, or you need to get an outside loan to start a small business. Although businesses earn their own business credit rating after some time, initial startup loans will generally be provided or denied based on the owner’s personal credit score. How does having student debt affect your eligibility for a small business loan?

Student Loans and Credit Score

Student loans can affect your credit score in several ways — merely having student loans doesn’t necessarily mean that your credit score will suffer. Regular on-time payments towards your student loan balance can actually improve your credit score over time. Alternatively, missing payments can lead to student loan default, which will hurt your credit score.

In short, having student loan debt doesn’t necessarily disqualify you from receiving small business loans for your startup. However, banks may be cautious about giving you a small business loan if they are concerned about your ability to meet your payment obligations. If this happens to you, then you should try to lessen the impact of your student loan, either by decreasing your monthly payments or by paying down your student debt more quickly.

Lowering Your Student Loan Burden to Start Your Business

If your student loan debt is getting in the way of your small business dreams by making it more difficult for you to take out the business loans that you need, then you should try to lessen the impact of student loans on your life. You can do this by opting for repayment plans with lower monthly payment expectations, or by trying to pay off your student debt more quickly.

Income-Based Repayment Plans

Federal student loans typically have a variety of options available for repayment. If you’re interested in minimizing the day-to-day impact of your student loan payments on your personal finances, income-based repayment plans could be for you. These plans tailor your payment amounts based on your income. You can even end up paying as little as $0 if your income is low enough. However, income-based repayment plans are not the be-all end-all to your student debt woes. By making smaller payments, you will let your student loans accrue interest over a longer period of time. In the long term, this will mean that your student loans end up costing you more than they would have compared to a more aggressive repayment plan.

Student Loan Refinancing

If you want to pay your student loans off more quickly and end up paying less money in the long term, then student loan refinancing might be your best option. When you refinance your student loans, you end up taking out a new loan that covers your current student loan balance. This new loan is usually at a lower interest rate than the old one, helping you to save money. You should calculate your expected savings before committing to any one student loan refinancing plan so that you can do the most to minimize your student loan debt and start your small business.

Student Loan Forgiveness

In some circumstances, it is possible to have your federal student loan debt forgiven completely. In order to get student loan forgiveness while you start your own small business, you could try a few promising options:

• Create your own nonprofit organization. One way to have your student loan debt forgiven is to be employed by a certified 501(c)(3) organization. These are organizations that operate without collecting a profit and help to satisfy some public need. After working at a nonprofit for 10 years while making consistent, on-time payments on an income-driven repayment plan, your student loan debt may be forgiven.
• Work another job before starting your small business. Jobs such as being a teacher or a nurse sometimes come with student loan forgiveness after a few years of service in certain high-need areas.
• Join the military before starting your small business. Different branches of the military will sometimes offer student loan forgiveness or student loan aid as a reward for enlisting. Once you’ve done your time and your student loans are paid off, you’ll be in a prime position to start your small business.

Graduating with student loan debt doesn’t mean that you have to give up on your dreams. Making regular payments on your student loans can actually help you when you’re trying to get small business loans. However, if your student loan burden is making it difficult to receive approval from the bank for your small business loan, then there are several options to help you pay down your debt more quickly.