It’s no secret that North American students are increasingly challenged by the pressures of debt used to finance their post-secondary educational pursuits. The Canadian Federation of Students pegs the average student debt at$27,000, which is close to the nearly $26,300 many students said they expected to owe after graduation in a recent BMO survey.
A study by Penn State University co-authored by Brent W. Ambrose, Larry Cordell and Shuwei Ma has explored the relationship between student debt and the small business economy (albeit in the United States.) According to the Penn State report, between 2000 and 2010, one standard deviation increase in student debt reduced small business creation by 14 percent, on average.
The researchers found that the correlation only exists for the smallest of small businesses. Those businesses are the most likely to rely on the founder’s personal credit.
Demographically speaking, the Canadian small business sector is dominated by businesspeople between the ages of 50 and 64. However, in urban environments with younger populations as well as those areas being settled by younger professionals priced out of increasingly competitive housing markets, a new generation of small businesses is being founded – one with its own set of terms and requirements for cost-efficient operation and access to capital.
“To summarize our findings, comparing the results of the growth in student debt and the growth in total debt on net business formations, we see that student debt differs from overall consumer credit. While student debt is used to fund increases in human capital (education), the utilization of student debt reduces an individual’s ability to access other forms of credit. As a result, the results suggest a debt trade-off where larger amounts of student debt lower the ability of individuals to start new small businesses.”
The full report features a wealth of interesting statistics and demographic research into the correlation between student debt and business capital, as well as investigating the economic relationships between borrowers and their debt, businesses and their productivity. It appears that student debt levels and small business performance are significantly linked: improving access to capital will lower the barriers to the creation of new businesses and jobs, ideally generating a loop of positive feedback toward better-educated management and more financially stable small business proliferation in the young professional community.