Starting a business with student loan debt may seem like an unachievable goal. When you’re making large loan payments each month, it can be challenging to find the funds you need to launch the empire of your dreams.
Additionally, you might feel tied down to a full-time job that allows you to make your monthly loan payment. Combined, these factors can leave you with little time and money to work on the intricacies of business startup.
A recent report reflects this difficulty: graduates who have $30,000 or more in student debt were found to be 11% less likely to start a business than debt-free graduates.
Despite all of this, with careful strategizing, starting a business with student loan debt is well within your reach. In this guide, we’ll go over everything you need to know about starting a business with student loan debt.
How to Start a Business with Student Debt: Key Points
Starting a business is complex whether you have debt or you’re debt-free. However, in general, starting a business with student loan debt is more complicated than starting a business debt-free.
If your goal is to start a business and you have student loans to pay off, you’ll want to consider these key strategies:
- Get organized and understand your debt.
- Adjust your repayment plan.
- Consider refinancing or consolidation.
- Think about pausing your student loan payments.
- Start small and keep your overhead costs low.
- Get creative with funding your business
Below, we’ll go over each of these points in more detail.
Get Organized and Understand Your Student Debt
Starting a business with student loan debt can be difficult enough without guessing at how much you owe, when you’ll have your loans paid off, and whether or not you could be paying less.
Before you start searching for funding or laying out business plans, make sure you understand your student debt in all its fine details.
Lay out all the numbers and take note of who your loan servicers are. If you have any questions about your loans, the servicer listed on your loan statement is who you’ll need to contact. Read this guide to check your loan balance and see who your servicers are.
Getting your loan information organized can also help ensure that you don’t slip up and miss any payments. When you’re starting a business, you want to keep your credit in good standing. Missing your student loan payments won’t help with that.
Adjust Your Federal Loan Repayment Plan
Getting enrolled in the right repayment plan can make all the difference in whether you’re able to start a business with student loan debt successfully or not.
Federal loans usually come with a standard 10-year repayment plan. However, you can change that repayment plan to adjust your monthly payments. Doing so will give you more flexibility as you start funding your business.
Extended Repayment Plan
This plan extends your repayment term to 25 years, which will significantly reduce your monthly payments compared to the standard 10-year plan.
Keep in mind that any time you extend the amount of time it takes to pay off a loan, the more time the loan has to accrue interest and the more you’ll pay overall.
A graduated repayment plan will grant you lower monthly payments at first, with payments increasing periodically—usually every two years. You’ll still pay off your loan over a 10-year period.
This option is worth considering if you’re confident that your business will start out slow but gradually increase in profitability over the next 10 years.
Income-Driven Repayment Plans
On the IBR plan, you’ll pay 10% (new borrowers after 2014) or 15% (borrowers before 2014) of your discretionary income per month. Your payment will never exceed what you would pay on the standard 10-year plan.
If your income is already relatively low, an IBR plan is likely your best option. (You can’t qualify if your calculated payments based on income exceed what you’d pay on a 10-year plan.)
An IBR plan will allow you to pay only as much as you can reasonably handle, based on your income, and it will let you pay more as your business grows.
With the PAYE program, you’ll pay 10% of your discretionary income per month. Your payment will never exceed what you would pay on the standard 10-year plan.
If you have older loans (from before 2014), the PAYE and REPAYE plans can grant you lower monthly payments than IBR.
- Income-Contingent Repayment (ICR)
With an ICR plan, your monthly loan payment is based on one of two calculations: either 20% of your discretionary income or whatever you would pay on a 12-year repayment plan. ICR bases your monthly payment on whichever of these options is lower.
Since you don’t have to demonstrate financial hardship to qualify, ICR is a good option if your income disqualifies you from the IBR plan.
Income-driven repayment plans may qualify you for loan forgiveness after 20-25 years of qualified loan payments. If you want to start the clock on those 20 to 25 years, you should enroll one of the income-driven repayment plans listed above (IBR, PAYE and REPAYE, and ICR) as soon as possible.
Keep in mind that IDR plans are federal programs, and they won’t apply to your private student loans. To learn more about your income-driven repayment options, click here: Income-Based Repayment Plan: Benefits and Other Options
Consider Refinancing or Consolidation
Another way to lower your monthly loan payment and free up those funds for your business is by consolidating or refinancing your loans.
With private loan refinancing, you can combine your private loans and federal loans—or just one or the other—into a single loan. Not only will this give you the benefit of simplifying your monthly payments, but depending on your credit score and income, it could also reduce your interest rate.
If you have federal loans and your credit score has improved significantly since college, you’ll likely qualify for an interest rate that’s lower than the fixed federal rate. Refinancing can also allow you to get better rates than you had on previous private loans.
If you want to refinance with the help of a cosigner, you could qualify for even lower interest rates.
If you refinance federal loans with a private loan, they will no longer qualify for any federal loan programs, including income-driven repayment plans.
For your federal student loans, you have the option to consolidate with a Direct Consolidation Loan. This option allows you to combine your multiple student loans into one loan. You cannot consolidate private loans within a federal consolidation loan.
A federal consolidation loan doesn’t offer the benefit of reduced interest rates based on your credit score (federal interest rates are set by the government), but it can still lower your monthly payment by extending your repayment term up to 30 years.
Additionally, if you have older loans like FFEL or Perkins loans, consolidating can qualify your loans for IDR plans and other federal programs where they would not have qualified before.
Learn more about refinancing and loan consolidation here: Can You Refinance Your Student Loans? A Guide to Student Loan Refinancing
Think About Pausing Your Student Loan Payments
Lowering your monthly payments can be a great start if you’re starting a business with student loan debt. With loan deferment or forbearance, you may even be able to put those payments on pause altogether. Federal loan deferment can last from six months up to several years.
However, pausing the payments on your student loans, even for a short time, can have long-term consequences. Before you put your loans in deferment or forbearance, make sure you calculate the interest that will accrue during that time.
With subsidized federal loans (including Direct Subsidized Loans, Subsidized Stafford Loans, and Subsidized Consolidation Loans), you’re not responsible for any interest that accrues during a deferment period.
With all other types of loans, interest will continue to accrue on your loan while it’s in deferment or forbearance. When the deferment period is over, the unpaid interest will be capitalized, or added to the amount you borrowed.
Private lenders often offer a forbearance option, but some do not. Those that do offer forbearance typically only offer to pause payments for a few months. With private loans, you will continue to accrue interest during times of forbearance.
Deferment or forbearance may be a viable option when you’re starting a business with student loan debt, but only after you’ve considered income-driven repayment and other options. With an IDR plan, your monthly payment can be as low as $0 if you’re unemployed or earning very little money.
Keep Your Overhead Costs Low
When you’re starting a business with student loan debt, you may be able to re-route some of your monthly loan payments towards your business with the help of income-driven repayment.
However, you still might not have the savings it takes to make a large-scale investment in materials, office space, and other overhead business costs.
Luckily, starting a business no longer requires a massive investment upfront. Gone are the days when you needed a brick-and-mortar office just to operate. Now, all you need to get started is a laptop and an internet connection.
Depending on whether you’re starting a service-based business or a product-based business, you’ll have very different costs going in. If your funds are minimal, consider shifting your business model to one that’s service-based.
Get Creative with Funding Your Business
If overhead is unavoidable, or you just need some cash to get the ball rolling, you may need to get creative with funding your business when you have student loan debt.
- Startup Loans
A small business loan is an option worth considering if you’re starting a business with student loan debt.
However, you may want to avoid taking on additional debt if you’re still paying off your student loans. Taking out additional loans, or putting purchases on a credit card, will increase your debt-to-income ratio. A high debt-to-income ratio can make future purchases—like buying a house—difficult.
If you decide to take out a small business loan, shop around for the best interest rates before making your decision, and only borrow as much as you need. If you have good or excellent credit, you can qualify for a decently low-interest startup loan, even with student loan debt.
If you have an idea for something great, and all you need is the capital to create it, crowdfunding could be the perfect solution.
Platforms like Kickstarter and Indiegogo have helped countless entrepreneurs reach goals and start businesses that wouldn’t have been possible without interested investors. When you create your crowdfunding campaign, focus on what you have to offer, and be prepared to deliver on your promises.
If your business is based on your skills as an artist or creator, you may consider Patreon as a way to fund your content on a subscription basis.
Of course, there’s no guarantee that you’ll find funding in crowdfunding. But if you believe in your product or service, it’s worth putting it out there to see how people respond.
- Angel Investors and Venture Capitalists
If you’re especially confident in your business idea, a small business investor or venture capitalist may be interested in helping you along (for a small stake in the business, of course). Sites like AngelList can help you connect with potential startup investors who might be interested in striking a deal.
Partnerships with experienced entrepreneurs can offer double benefits: you can acquire the funds you need to get started, as well as valuable advice from someone who’s been in your shoes before.
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