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Missing in Action: Younger Entrepreneurs Weighed Down By Student Loans

In a 2014 survey of millennial Americans, researchers at Bentley University found striking evidence of an entrepreneurial streak in the younger generation: 66% of millennials polled said they’d like to start their own business.

However, recent data suggests that, so far, that professed entrepreneurial urge has not led to a groundswell of new business launches. And one reason for that slow start could be student loan burdens.

The Missing Millennial Entrepreneurs: ‘A Different Reality’

Look to the media and you’ll find no shortage of anecdotal reports and profiles of youthful business leaders like Facebook’s Mark Zuckerberg and others who’ve amassed sizable fortunes by starting their own companies.

But a February research report from the U.S. Small Business Administration (SBA) Office of Advocacy tells a different story. That report, titled “The Missing Millennial Entrepreneurs,” reveals a pronounced trend of millennials shying away from self-employment.

SBA researcher Daniel Wilmoth takes a hard look at Census Bureau data to find a “relative scarcity” of younger entrepreneurs among the self-employed, despite the fact that the millennial generation (defined by Pew as those between the ages of 18 -34 in 2015) represents the largest cohort in the American workforce.
The spectacular entrepreneurial successes of some millennials and the proliferation of programs designed to replicate that success together create the impression of a generation in which entrepreneurship is thriving. However, our examination of survey data exposes a different reality. In 2014, less than 2 percent of millennials reported self-employment, compared with 7.6% for Generation X (born 1963 to 1981) and 8.3 percent for Baby Boomers (born 1944 to 1962).

The SBA study partly attributes the low rate of self-employment to youth – that is, younger workers in their early career stages are simply less likely to have their own businesses. But a broader secular trend of declining self-employment over time suggests millennials may be less likely to start their own businesses in the future, and that “self-employment is likely to remain relatively low among millennials for decades,” Wilmoth writes.

His findings comport with those of a Kaufmann Foundation study of start-up trends published last year, which tracked a marked decline in younger entrepreneurs. Among new entrepreneurs, the Kaufman study found, only 24.7% were age 20-34, compared to 34.3% in 1997.

The burden of student loans

What’s to account for the vast gap between millennials’ entrepreneurial dreams and the tough reality? One key factor, many observers agree, is high levels of student loans.

Previously we looked at how student loans may be making it difficult for young workers to move ahead with key life decisions, like starting families and buying homes.

Add “starting a business” to that list those delayed decisions. According to the “Life Delayed” study published in 2015 by American Student Assistance, among young workers who stated an interest in starting a business, 61% said student loans would affect that decision.

U.S. college graduates in 2015 had the dubious distinction of being the most indebted in history, according to the Wall Street Journal-although if current trends hold, they’ll soon by overtaken by the class of 2016. Altogether, there’s an estimated $1.3 trillion in outstanding student loan debt in the United States. Student loans are now the second largest pool of consumer debt, outpacing even auto loans and second only to mortgage debt.

Another SBA report, from 2014, takes a closer look at how student debt is affecting young entrepreneurs, detailing key facts about the relationship between debt and self-employment. Among the findings:

Student debt is rising. In 1995, the mean debt level for families with student debt was $12,000 (adjusted for inflation). By 2013, that number was $29,000.

While debt rises, self-employment is declining. Between 1995 and 2013, the number of Americans under 40 carrying student loans nearly doubled, growing from 21% to 37%. Yet self-employment among the same group declined from 15 percent to 12 percent during the same time period.

Those without student loans applied for business loans in a greater percentage than those with student loans. In 2012, about 12 percent of young households with someone who identifies as self-employed that had student loans applied for a business loan in the past five years. For those without student loans, the percentage increased to 27 percent.

Businesses owned by student loan holders are smaller. On average, young business owners without student loans employed about nine workers, while those with student loans employed only two.

Those are illuminating numbers, but keep in mind that research about entrepreneurs can only account for those who were actually self-employed. There’s little clear data on young people who might have started a business but didn’t, due to their debt burden-it’s difficult to measure something that doesn’t happen.

The psychology of student loans could be making many young workers, who might like to follow their entrepreneurial dreams, more risk-averse. After all, one of the downsides of starting your own business is that you might not succeed. And even successful entrepreneurs often face years of lean times as they struggle to get their enterprises off the ground.

The foreboding reality is also that many of these young workers will not necessarily grow more entrepreneurial as they get older. For many people, the prospect of starting a business venture of their own becomes less likely as they accumulate additional responsibilities for mortgage payments and raising children.

Of course, student loans aren’t the only reason younger entrepreneurs are off to a slow start. Many millennials came of age during the 2007-2009 recession and subsequent sluggish recovery, a climate that likely dampened opportunities for attaining credit and launching businesses.

Why should investors, market experts and economic watchers pay heed to this trend?  Because as a demographic that should be naturally more entrepreneurial sits on the sidelines, it could have a negative impact on the nation’s economic growth. Smaller businesses and start-ups are key drivers of job creation, and research shows that younger businesses create more new jobs and are engines of innovation.

There’s no easy answer to this dilemma. But policymakers hoping to change the trajectory should turn their attention to sensible reforms to make college education more affordable, encourage entrepreneurship and reduce the obstacles to starting new businesses.