Can I start a business if I have student debt?
“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to askbrianna@nerdwallet.com.
Q: I’d love to start my own business, but I’m still paying off student loans. Will I be able to I become an entrepreneur?
A: Starting a business is tempting for so many reasons: You can be your own boss, set your own hours, create something from scratch — maybe even change the world.
But businesses have startup costs, and most grads are already in the red. In 2015, about 7 in 10 college graduates left school with student loan debt, an average of $30,100, the Institute for College Access & Success reports. Student loan payments eat into your cash flow, and a history of missed payments will affect your credit score. Banks look at both cash flow and credit scores when evaluating small-business loan applicants, says Jay DesMarteau, head of small-business banking at TD Bank.
This doesn’t mean you need to shelve your small-business plan until you’ve paid off those student loans, but you’ll need to manage your debt burden thoughtfully and strategically. Here’s how.
LOWER YOUR STUDENT DEBT BILLS
Cash flow is king when you’re starting a business, and cutting your monthly student loan bill is one way to free up money. The federal government’s incomedriven repayment plans can provide relief by capping your federal loan payments at a percentage of your income. You must apply on studentloans.gov and recertify your eligibility every year.
Reducing payments on private student loans requires other strategies. If you’re working full time and have a credit score in the mid-600s or higher,
Student loan payments eat into your cash flow, and a history of missed payments will affect your credit score.
you may be able to refinance your student debt. You’d get a lower interest rate, but lenders will want to see that you’ll be able to pay them back easily. That makes refinancing a good option for people whose business is currently a side gig or is already consistently generating enough income to cover all expenses comfortably, including debt obligations. That can be difficult in the early stages.
NEVER MISS A LOAN PAYMENT
Make all your student loan payments on time so you build a sterling credit score. Lenders will use it when considering whether you’re eligible for a smallbusiness loan.
Nicole Beltz, 28, didn’t fall behind on her bills when she started a business a year and a half after graduating from Delaware Valley University in Doylestown, Pennsylvania.
She continued to pay down her $20,000 student loan balance and used personal savings to build her business, Serendipity Shops. She budgeted around her monthly loan payment like she did for every other unavoidable expense.
“The school loan was never really an issue,” she says. “You just factor it in.”
EVALUATE THE MARKET AND MAKE A PLAN
Before you commit to your business idea full time, find free or cheap ways to test whether there’s a market for it. When you’re ready, write a business plan that includes projected sales and revenue. Many businesses fail because they miscalculated their likely expenses and revenue, says Bob Godlasky, director of academic mentoring at Orange County Score, part of a national volunteer business mentoring network.
Beltz started Serendipity Shops by buying an existing business — Antiques Etc. in Avalon, New
Jersey — and then inviting local merchants to sell their wares in the store for a fee. That helped cover her commercial rent.
“It was a little bit easier than starting from scratch and having to fill an entire, huge storefront with inventory,” Beltz says. Four years later, she runs three stores in New Jersey and Pennsylvania.
Your business plan also should detail how you’ll market your product and price it appropriately, says Steve Cohen, president of Excelsior Growth Fund, a nonprofit small-business lender based in New York. Aim to have enough money saved to cover potential losses at first; a mentor who has been in your shoes can help you develop a strategy. A tax professional or financial planner who works with similar businesses also can give you an idea of expenses and profits to expect.