Starting a business can be an expensive adventure. Your savings may disappear, and you may be looking for small business loans or lines of credit to keep your dream alive. But in order to start a business with student loan debt, you have to take other considerations into account, too.
For many recent or not-so-recent college graduates, student loan debt can make plans to start a business seem impossible. As of 2021, 43 million borrowers had about $1.748 trillion (yes, trillion with a T) in student loans, and the average college graduate in 2021 had $37,667 in federal student loan debt. If you include private student loans, that average may be as high as $40,274.
Fortunately, even with student loan debt, you can plan and start your dream and still make your payments on time. Here’s your guide to starting a business with student loan debt.
Know Your Current Financial Position
Before you start your new venture, it’s important to know your current financial position. It is possible to start a business with debt, whether it’s student loan debt, credit card debt, or other debt. But you have to know what those debts are and what they mean to your credit score.
Your personal finances, debts, and especially your credit score can have a big impact on your ability to lower your student loan payments and secure small business financing to cover startup costs. The better your credit, the better your financing options will be.
Credit is affected by things like your debt-to-income ratio, how old your accounts are, how often companies do a hard check on your credit score, and whether or not you pay your debts on time. Some financial institutions consider student loan debt to be “good debt” as long as you make your monthly payments on time because it can help you build your credit.
How much debt you have can affect other aspects of your entrepreneurship journey, such as what business credit cards you qualify for or whether or not a bank will let you open a business checking account.
Once you’ve started your business, you’ll want to keep track of your business credit scores, too.
Explore Your Student Loan Repayment Options
Did you know you may have several student loan repayment options? You may be eligible for a lower interest rate through consolidation or other efforts.
As long as you’re working with a loan payment, any efforts to lower that payment will make it less of an immediate hindrance to your business plan and operations. Read on for some options on student loan repayment plans.
Although it may be difficult to consolidate your private student loan, you may be able to refinance it. Private lenders often compete with each other to offer lower interest rates or longer terms. Make sure you find the right loan provider for your needs.
Refinancing a federal loan can mean that you lose the federal protections on that loan, including the possibility that it could be canceled by new legislation or how long you’ve had it. As you look to lower your payment, be sure to know what type of student loans you have in order to choose the right refinancing or consolidation option for you.
Forgiveness or cancellation
There are also student loan forgiveness programs available for people who have chosen to go into public service or teaching, and some loans may even be canceled due to hardships such as permanent disability, death, or bankruptcy.
Wait a little longer to start your own business
Another option could simply be to wait a little longer and continue working a 9-to-5 job and pay down your loans as much as possible. While delaying your dreams is never a fun pill to swallow, taking that extra time with a strict budget to pay down that debt or even pay it off could make all the difference moving forward.
Keep Excellent Financial Records
In general, it’s a good idea to keep financial records for seven years to ensure you’re able to come up with the information should you be audited by the IRS. Student loans are no exception. You may be tempted to get rid of the payment records once you’ve paid your balance down to zero, but having the original documents is important if a collection agency ever challenges you on your paid-off loan. Student loan collections aren’t like the IRS; they don’t necessarily have a cut-off for how long you should keep their documents. And there’s no guarantee that you’ll have access to paperless documents once you close out your account by paying it off.
A few documents that are important to keep as long as possible, whether you have them in paper or digital format, include:
- Master promissory note
- Student loan bills by month
- Any correspondence, including collections, lender letters, or loan servicer details
- 1098-E tax documents
Make a Plan
After you’ve made your loan payments as small of a burden on your cash flow as possible, it’s time to make a plan to start your business. Whatever your idea is, there’s a specific market you’ll need to target, and a business climate you’ll need to adjust to. Taking the time to ask the right questions and do the research will pay dividends moving forward, and save you oodles of time and money.
As you write your business plan, remember that the first people you’ll have to sell to will be your investors or lenders. Detail your business strategy, your price points, and how you’ll market your product. An in-depth and well-developed business plan can make all the difference in getting your small business off the ground.
Getting Funding For Your Business
If you’re a recent graduate or recently liberated from your student loans, your savings might be a bit thin. Even if you have a happy, healthy bank account, you’ll need to find funding at some point for your business. If you’ve kept up on your payments and maintained a solid credit profile, there are loan options available for your new business.
Apart from financing, you can seek out other means such as crowdfunding and business grants, all of which can provide that all-important initial injection of capital to get you off the ground.
Whatever your idea may be for a business, just remember that student loan debt doesn’t have to hold you back from entrepreneurship. Analyze your budget and your options, get planning, and bring your dreams to life.
If you’re like other small business owners and entrepreneurs, you may need financing to help get your project off the ground. While you can rely on angel investors or crowdfunding like GoFundMe or Kickstarter, you have other options like small business loans or business credit cards. Start a free account with Nav to see your business finance options today.
This article was originally written on May 11, 2018 and updated on February 8, 2023.