Despite tech savvy and higher levels of education than prior generations, mounting student debt levels are beginning to drag down younger Americans’ startup ambitions, according to a new report.
“Saddled with student loan debt, millennials can’t afford to be entrepreneurs,” according to 2015 state of entrepreneurship report from the Kauffman Foundation, a nonprofit devoted to studying entrepreneurship.
Startup rates among Americans ages 20-34 peaked at 35 percent in 1996 and has since declined to 23 percent in 2013, according to Kauffman.
In addition to the annual summary, Kauffman’s monthly readings on entrepreneurial activity show a decline among millennials. Young adults launched about 40,000 fewer new businesses a month in 2013 compared to 1996.
The Kauffman report is among a growing pool of sometimes-conflicting data about the future of millennials and startup activity. While Silicon Valley is hot with startups, battling it out for top talent, Kauffman’s report offers some skepticism about young adults and their impact on business creation.
For example, a separate report by Babson College on global entrepreneurship found that more young people ages 25-34 are starting businesses. The report, released this month, found that 18 percent of young Americans were starting new businesses last year, higher than 15 percent in 2013. In contrast to other studies, Babson researchers monitor individuals starting companies while they’re still employed, which may account for some of the discrepancy.
The Kauffman report also raises questions about the ripple effects of younger workers. For example, despite expressing strong interest in startups, millennials have created fewer businesses since they entered the workforce in the early 2000s.
The nonprofit also says it’s unclear if the explosion of college startup programs—a growing cottage industry on campuses—will actually translate to business creation.
Given shifts among younger workers, the concern now is whether entrepreneurship rates in total (including older workers) will continue to recover from the recession lows or plateau to a kind of “new normal” of lower entrepreneurship activity.
Startups despite student debt
To be clear, Kauffman’s annual summary excluded specific figures or percentages on the impact of, for example, student debt levels or college startup programs on entrepreneurship rates. The report instead raises some skepticism about millennials and startup rates.
The correlation between student debt and entrepreneurship is intriguing, of course. But this area of research has only begun among experts at Kauffman and other organizations.
The relationship between debt and entrepreneurship is “complicated,” says Dane Stangler, vice president of research and policy at Kauffman. “On the one hand it makes sense that if you are coming out of college or grad school with a load of student debt, starting a company is not among your most viable priorities,” Stangler said. “On the other hand, we didn’t expect hoards of 22-year-olds to start companies. They do get to more entrepreneurial-inclined ages [late 30s and early 40s] they will have better control of their finances.”
Other experts say the long-term impact of student debt on startup creation remains to be seen.
“There are certainly young people who would like to start companies, have student debt and feel that because of that they can’t,” says Sandy Baum, a senior fellow at the Urban Institute. “On an individual basis that is probably true. But would a high percentage of people, who have student debt, not become entrepreneurs because of that? That seems unlikely,” she said.
Just ask 31-year-old Zachary Schwitzky.
Despite having $12,000 in undergraduate debt from Seton Hall University, Schwitzky, then 29, launched Newlio, a New York City-based market research company. The startup creates customer surveys for big clients, including McDonald’s and Hilton.
His debt may be a nuisance, but it also motivates him. “Starting my own company without any financial obligations can make it easier to not put the work in,” Schwitzky says. “I have something to fuel the fire.”
His company has raised $1.8 million in two private funding rounds, and is about six months away from being profitable, Schwitzky says.
Photo credit: CC by Chris Potter