Study: Rising student debt holds back business starts

A preliminary study out of Pennsylvania State University and the Federal Reserve Bank of Philadelphia suggests that higher student debt relates to the number of small businesses opening. Presenters at a forum on growing Maine’s economy last week identified student debt as a barrier to economic growth and attracting and retaining younger Mainers.

While the study, covered in a May 24 column in The New York Times, is still being refined, its authors claim to have found a correlation between changes in student loan debt, which has ballooned to $1.1 trillion from $300 billion a decade ago, and the formation of new businesses with one to four employees.

The study found that in counties where student debt increased its share of the total consumer debt — mortgages, credit cards, car loans — the number of businesses started with one to four employees dropped. It factored in county-level differences in population, demographic makeup and other local economic conditions. The study attributes that to smaller businesses relying more heavily on personal debt to get started, whereas larger firms have access to other financing.

Speakers at the forum in Portland suggested that the state look at either subsidizing student debt for students who move here for school and stay afterward or eliminate out-of-state tuition at state universities and community colleges. The website projectonstudentdebt.org ranked Maine seventh-highest in the country for the average student debt of Maine graduates, based on 2012 figures from Peterson’s Undergraduate Financial Aid and Undergraduate Databases.

On average, the study found the relative amount of student debt rose 4.7 percent in all counties and that increasing that growth rate by 3.8 percent corresponded to a 25 percent reduction in business starts in the one-to-four-employee category.

The study said it aimed to fill a gap in research about the impact of student debt on the economy.

In Maine, nearly 60 percent of all businesses are in the one-to-four-employee category, but the total economic impact of that group is much smaller, making up more than 8 percent of the annual payroll and total employees in 2011.

Explore the impact of each employer size category on Maine’s economy in the chart below, from 2011 census figures:

Do you think efforts to reduce student debt in Maine would be an effective economic development strategy?

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Darren Fishell

About Darren Fishell

Darren is a Portland-based reporter for the Bangor Daily News writing about the Maine economy and business. He's interested in putting economic data in context and finding the stories behind the numbers.