Student Loans as a Barrier to Entrepreneurship
America’s student debt crisis disproportionately hurts students of color. Black and Latinx students, in particular, are more likely to borrow student loans at higher amounts and experience greater economic distress from paying their loans than their White peers. According to the Center for Responsible Lending, 85 percent of Black college graduates and 66 percent of Latinx college graduates had student loan debt in 2016, compared to 70 percent of their White peers. The average loan amount for college graduates was about 30,000 dollars, but Black college graduates borrowed about 34,000 dollars and Latinx college graduates borrowed about 25,000 dollars on average. Even while Latinx students may have lower averages, they still face larger barriers to repayment relative to their White peers. For students entering loan repayment in 2017, the Center for American Progress’ analysis showed that 32 percent of Black borrowers and 20 percent of Latinx borrowers defaulted on their loans at some point in the preceding six years, whereas a mere 13 percent of White borrowers defaulted. Racial disparities in family wealth, future earning potential, and higher education achievement outcomes, among other factors, contribute to Black and Latinx students’ struggles with student loans.
On the connection between student loans and entrepreneurship, studies found that student debt limits access to credit and therefore hinders one’s ability to start a small business. In fact, researchers at the Federal Reserve Bank of Philadelphia and Pennsylvania State University found an increase of one standard deviation in student debt led to a 14 percent decrease in the formation of small businesses between 2000 and 2010. Another study found that the negative association between student loans and entrepreneurship was much stronger for younger individuals. With accessing capital already being a major barrier to entry for Black and Latinx entrepreneurs, how is the student loan crisis changing their perceptions of entrepreneurship? My MPP project suggests that aspiring young Black and Latinx entrepreneurs envision student debt will hinder their pursuit of entrepreneurship, in alignment with existing literature on the topic.
Opportunity and wealth gaps similar to those responsible for producing racial disparities in student loans hold back Black and Latinx entrepreneurs as well. Black and Latinx people are underrepresented in entrepreneurship. Data from the Census Bureau's 2018 Survey of Business Owners showed Blacks owned 2 percent and Latinx owned 6 percent of U.S. businesses, though they comprised 12 percent and 18 percent of the U.S. population. This gap was closer or equal to parity for smaller minority groups such as Asians. While access to capital is the biggest barrier for entrepreneurs as a whole, Black and Latinx entrepreneurs disproportionately struggle to raise funds for their business. They are discouraged from borrowing and experience higher rates of rejections when seeking loans and investments relative to their White counterparts. Due to racialized income and wealth gaps, Blacks and Latinx have less disposable income and wealth to invest in their businesses. The typical White family had about eight times the wealth of the typical Black family and about five times the wealth of the typical Latinx family in 2019.