By: Sarah-Eva Marchese and John Dearie
Student loan debt, a serious and worsening problem for years, has now reached levels that threaten America’s economic future.
According to the Federal Reserve, total outstanding student loan debt reached $1.56 trillion as of Sep. 30, more than tripling from $480 billion in 2006. Student loan debt is the only category of consumer debt that has grown continuously since the Great Recession and is now the second-largest category of consumer debt after mortgage debt.
Confronted by two unfortunate trends over the past two decades — reductions in state funding of higher education coupled with rapidly increasing tuition costs — American students have increasingly relied on borrowing to cover the costs of college.
As a result, members of America’s college class of 2017 graduated with an average debt of $39,400, up 6 percent from the previous year. In total, some 44 million Americans — one in four adults — are paying off student loans.
Mounting student debt poses serious challenges to the U.S. economy. As former students struggle to pay back their loans, they’re forced to postpone or rule out other purchases and investments like home ownership, which has dropped to a three-decade low among Americans in their 20s and 30s, creating a drag on the economy.
A particularly dangerous anti-growth effect of record student debt is its depressive impact on entrepreneurship. Recent research has demonstrated that new businesses, or “startups,” are disproportionately responsible for the innovations that drive economic growth and account for virtually all net new job creation.
But starting a business is risky — nearly half of all startups fail within five years. Launching a new business while carrying a mountain of student debt can be virtually impossible. An analysis released last May found that “student debt is negatively related to the propensity to start a firm, particularly larger and more successful ventures.”
Indeed, millennial entrepreneurship is in free fall. The share of Americans under 30 who own a business has plunged 65 percent since the 1980s and is now at a 25-year low. According to a 2016 Small Business Administration report, millennials are the least entrepreneurial generation in recent history.
Such circumstances amount to nothing less than a national emergency, which requires a commensurately serious policy response.
With this reality in mind, we propose that Congress pass new legislation that we’ve tentatively entitled the “Entrepreneurship, Growth, and Opportunity Act” (EGOA).
The legislation would be modeled on the Public Service Loan Forgiveness (PSLF) program, which was created by the College Cost Reduction and Access Act of 2007 (CCRAA). Under the terms of PSLF, former students who are full-time employees at a federal, state or local government agency, or a 501(c)(3)-designated organization, and who have made 120 on-time minimum student loan payments, are eligible to have their remaining student debt forgiven.
As we envision it, EGOA would have four principal elements.
First, entrepreneurs launching new businesses and those choosing to work for a startup would be permitted to consolidate all existing student loans, both federal and private, into a single fixed-rate loan under the terms of the Federal Loan Consolidation Program, created in 1986.
Second, to provide immediate debt relief, minimum payments in service of the newly consolidated debt would be capped at $200 per month, or $2,400 annually. To provide further relief, annual payments on the consolidated student loan would be deductible from taxable income, an approach the state of Maine has recently implemented.
Third, if the entrepreneur or startup employee remains at a startup for five years (either a single firm or multiple new businesses) and has made loan payments of at least $200 on time for 60 months (five years) — for a total of $12,000 — any remaining student debt would be forgiven.
Such terms are generous and intentionally so, in order to effectively remove student debt as an obstacle for would-be entrepreneurs. But to ensure that such a program is also in the interest of the taxpayer, we envision one final element of EGOA.
We propose that entrepreneurs who participate in the EGOA program for five years and have their remaining student debt forgiven and whose total compensation — salary plus the market value of any equity awarded — exceeds $250,000 at any time during the subsequent 10 years, pay the U.S. Treasury a small percentage — perhaps 1 percent — of their total annual compensation.
Under the terms of EGOA, in other words, the U.S. taxpayer would, in effect, swap the forgiven debt for a stake in the entrepreneur’s potential subsequent success, with the possibility of a major pay-off.
For example, if a successful entrepreneur’s total earnings over the 10-year period following debt forgiveness were $5 million, a 1-percent assessment would generate a taxpayer bonus of $50,000 — far greater in most cases than the amount of debt forgiven.
Solving the problem of record student debt entails difficult philosophical and political questions. Is a college education necessary to thrive in the 21st-century economy? Should all Americans have easy access to affordable college? Should the government have a role in financing higher education, or is government contributing to rising tuition?
In the meantime, high student debt remains a major obstacle to entrepreneurship and, therefore, to faster economic growth, job creation and expanding opportunity.
Though not without administrative challenges — such as defining qualifying “entrepreneurs” and “startups” — EGOA is a potential solution. Freed from the burden of servicing student debt, many would-be entrepreneurs will take the risk of launching perhaps the next Microsoft, Google or Tesla.
The tax receipts generated by the additional economic activity and job creation driven by those new businesses, combined with potential bonus payments made by successful entrepreneurs, make the Entrepreneurship, Growth and Opportunity Act a winner for the U.S. taxpayer.