Small-business creation hampered by student debt, says research

Small-business creation — a critical economic engine — is significantly hampered in areas of the country where residents carry more substantial student loan debt, according to research co-authored by Brent Ambrose, of the Penn State Smeal College of Business.

In a recently updated study, which examined student loan debt across the United States by county and compared it with small-business creation in those areas, one standard deviation increase in student debt reduced small businesses by 14 percent on average between 2000 and 2010.

Ambrose, the Smeal chaired professor of real estate and director of the Institute for Real Estate Studies, along with Larry Cordell and Shuwei Ma at the Federal Reserve Bank of Philadelphia, conclude that potential entrepreneurs are so encumbered by student debt they can’t borrow more money to start a business.

“The research shows that individuals need to pay special attention to the decisions they make and realize that incurring debt has consequences,” Ambrose said.

The researchers found that the correlation only exists for the smallest of small businesses. Those businesses are the most likely to rely on the founder’s personal credit.

“The effect on larger firm formation is not significant,” the report, entitled “The Impact of Student Loan Debt on Small Business Formation,” read, “which we interpret to mean that these firms have greater access to outside capital.”

Centre County had the second-lowest growth rate for student loan debt of any county in the country. It trailed only Pinal County in Arizona, which is southeast of Phoenix and includes parts of four Native American communities.

It is unclear what effect the high number of students of Penn State employees from Centre County who attend Penn State and receive its tuition discount has on the county’s ranking. However, the research suggests that this area is ripe for small-business creation, in alignment with President Eric Barron’s stated goals and the recent partnership Penn State signed with the Chamber of Business and Industry of Centre County.

This correlation could have broad implications for the economy, the researchers said. They cited United States Small Business Association data that small businesses account for about half of the private-sector economy and 99 percent of all businesses. Almost 60 percent of new jobs in the private sector are created by small businesses.

Student loan debt almost tripled from 2004 to 2012 and is now about $1 trillion. While other forms of consumer debt (home equity loans, auto loans and credit card debt) declined during the recent financial crisis, the report said, student loan debt increased substantially. It accounted for 10 percent of all consumer debt in 2012, up from 2.9 percent in 2000.

“Given the enormous growth in the use of student debt in recent years, the issue of whether it may impact future small business formation is becoming critically important,” Ambrose said.

This story was originally published July 11, 2015 at 10:24 PM with the headline "Small-business creation hampered by student debt, says research."