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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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. As certified by your school and less any other financial aid you might receive. Minimum $1,000. Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation. This informational repayment example uses typical loan terms for a freshman borrower who selects the Flat Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.78% fixed Annual Percentage Rate (“APR”): 54 monthly payments of $25 while in school, followed by 96 monthly payments of $176.21 while in the repayment period, for a total amount of payments of $18,266.38. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 5/18/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.