Growth

Fast Lane: Increasing student debt could put young entrepreneurs on hold

Cara Waters /

The next generation of entrepreneurs may never get off the starting blocks as a result of the government’s plans to increase student debt.

In the changes outlined in this year’s budget, fees will be deregulated, allowing universities to charge as much as they want for courses.

This is likely to result in substantially larger university debts in some areas for students.

University graduates are also likely to be subject to higher rates of interest under the reforms with rates pegged to the government bond rate instead of inflation with a cap of 6% up from 2.9% currently. 

The impact of this is likely to be felt not just by the students affected but also in the wider economy.

In particular, graduates who may once have started a small business may have to put that dream on hold due to their increased debt.  

A study published this year in the US found people with student loans are less likely to start a business of their own.

The Impact of Student Loan Debt on Small Business Formation found areas with higher relative growth in student debt show lower growth in the formation of small businesses.

A small business was defined as a firm with one to four employees. 

The issue is access to capital, according to Brent Ambrose, professor of risk management at Pennsylvania State University and co-author of the study along with Larry Cordell and Shuwei Ma of the Federal Reserve Bank of Philadelphia.

When students use all their debt capacity on paying for university they can’t use it elsewhere.

 Given the importance of an entrepreneur’s personal debt capacity in financing a start-up business, student loan debt, which cannot be discharged via bankruptcy, can have lasting effects later in life and may impact the ability of future small business owners to raise capital,” a preliminary paper on the study says.

The study found a one standard deviation increase in student debt reduces 1-4 employee businesses by 25% on average between 2000 and 2010.

Australia needs more entrepreneurs not less.

The ramifications of the government’s move to hike up uni fees need to be considered in a broader economic context.

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Cara Waters

Cara Waters is the former editor of SmartCompany. Previously, Cara was a senior reporter at the Financial Times website FT Adviser in London and she also worked for The Sunday Times in London.

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